Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
__________________________________ 
FORM 10-Q
(Mark One)
 
x☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended July 28, 201827, 2019
or
or
o☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from ______ to ______
 __________________________________ 
Commission file number 0-2816
 
METHODE ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)


methodelog080115a14.gif
Delaware 36-2090085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
74018750 West WilsonBryn Mawr Avenue,Suite 1000,Chicago,Illinois 60706-454860631-3518
(Address of principal executive offices) (Zip Code)
(Registrant’s (Registrant’s telephone number, including area code) (708) (708) 867-6777
None
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: 
Name of each exchange
Title of each ClassTrading Symbol(s)on which registered
Common Stock, $0.50 Par ValueMEINew York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x☒  No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x☒  No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”filer.” “accelerated filer,” and “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerx
☒ 
Accelerated filer o
☐
Non-accelerated filer o
☐ 
Smaller reporting company o
☐
Emerging Growth Company o
☐  
(Do not check if a smaller reporting company)

 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the Securities Act. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o☐
  No x

☒
At August 28, 2018,27, 2019, the registrant had 36,986,95237,091,487 shares of common stock outstanding.

METHODE ELECTRONICS, INC.
FORM 10-Q
July 28, 201827, 2019


TABLE OF CONTENTS
  Page
   
PART I.
FINANCIAL INFORMATION
 
   
Item 1.
Financial Statements
 
   
 
Condensed Consolidated Statements of Income (unaudited) - Three Months Ended July 28, 201827, 2019 and July 29, 201728, 2018
2
   
 
Condensed Consolidated Statements of Comprehensive Income (unaudited) - Three Months Ended July 28, 201827, 2019 and July 29, 201728, 2018
3
   
 
Condensed Consolidated Balance Sheets as of July 28, 201827, 2019 (unaudited) and April 28, 201827, 2019
4
   
 
Condensed Consolidated Statements of Cash FlowsShareholders' Equity (unaudited) - Three Months Ended July 28, 201827, 2019 and July 29, 201728, 2018
5
   
 
Notes to Condensed Consolidated Financial Statements of Cash Flows (unaudited) - Three Months Ended July 27, 2019 and July 28, 2018
6
   
Item 2.Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2021
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28
Item 4.
Controls and Procedures
29
PART II.
OTHER INFORMATION
Item 1A.
Risk Factors
30
   
Item 4.6.
Controls and ProceduresExhibits
30
   
PART II.SIGNATURES
OTHER INFORMATION
Item 1A.
Risk Factors
32
Item 6.
Exhibits
32
SIGNATURES
3331



PART I.        FINANCIAL INFORMATION
 
Item 1. Financial Statements
 


METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in millions, except per share data)
 Three Months Ended Three Months Ended
 July 28,
2018		 July 29,
2017		 July 27,
2019		 July 28,
2018
Net Sales $223.4
 $201.2
 $270.2
 $223.4
        
Cost of Products Sold 163.3
 145.6
 194.4
 163.3
        
Gross Profit 60.1
 55.6
 75.8
 60.1
        
Selling and Administrative Expenses 29.5
 29.6
 32.4
 29.5
Amortization of Intangibles 1.9
 0.6
 4.8
 1.9
        
Income from Operations 28.7
 25.4
 38.6
 28.7
        
Interest Expense (Income), Net 0.2
 (0.2)
Interest Expense, Net 2.9
 0.2
Other Expense, Net 0.3
 0.8
 0.1
 0.3
        
Income before Income Taxes 28.2
 24.8
 35.6
 28.2
        
Income Tax Expense 4.5
 4.3
 7.3
 4.5
        
Net Income $23.7
 $20.5
 $28.3
 $23.7
        
Basic and Diluted Income per Share:        
Basic $0.63
 $0.55
 $0.75
 $0.63
Diluted $0.63
 $0.55
 $0.75
 $0.63
        
Cash Dividends:    
Common Stock $0.11
 $0.09
    
Weighted Average Number of Common Shares Outstanding:    
Basic 37,350,444
 37,248,689
Diluted 37,637,502
 37,561,240
Cash Dividends per Share $0.11
 $0.11
See notes to condensed consolidated financial statements.




METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in millions)
  Three Months Ended
  July 28,
2018		 July 29,
2017
Net Income $23.7
 $20.5
     
Foreign Currency Translation Adjustment (17.9) 24.6
Comprehensive Income $5.8
 $45.1
  Three Months Ended
  July 27,
2019		 July 28,
2018
Net Income $28.3
 $23.7
     
Foreign Currency Translation Adjustments (1.6) (17.9)
Total Comprehensive Income $26.7
 $5.8
See notes to condensed consolidated financial statements.

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)and per-share data)
  July 28,
2018		 April 28,
2018
  (Unaudited)  
Assets:  
  
Current Assets:  
  
Cash and Cash Equivalents $228.5
 $246.1
Accounts Receivable, Net 181.1
 202.6
Inventories:    
Finished Products 21.1
 15.4
Work in Process 9.1
 14.6
Materials 58.3
 54.1
Total Inventories 88.5
 84.1
Prepaid and Refundable Income Taxes 9.9
 2.4
Prepaid Expenses and Other Current Assets 15.9
 14.8
Total Current Assets 523.9
 550.0
Property Plan and Equipment:    
Land 0.8
 0.8
Buildings and Building Improvements 74.0
 69.2
Machinery and Equipment 362.9
 364.7
Property, Plant and Equipment, Gross 437.7
 434.7
Less: Allowances for Depreciation 272.4
 272.5
Property, Plant and Equipment, Net 165.3
 162.2
Other Assets:    
Goodwill 58.8
 59.2
Other Intangible Assets, Net 58.2
 61.0
Cash Surrender Value of Life Insurance 8.5
 8.2
Deferred Income Taxes 41.5
 42.3
Pre-production Costs 23.4
 20.5
Other 13.2
 12.5
Total Other Assets 203.6
 203.7
Total Assets $892.8
 $915.9
Liabilities and Shareholders' Equity:  
  
Current Liabilities:  
  
Accounts Payable $79.0
 $89.5
Salaries, Wages and Payroll Taxes 17.6
 22.8
Other Accrued Expenses 21.4
 21.6
Short-term Debt 3.9
 4.4
Income Tax Payable 14.9
 18.7
Total Current Liabilities 136.8
 157.0
Long-term Debt 49.2
 53.4
Long-term Income Taxes Payable 42.6
 42.6
Other Liabilities 4.4
 4.6
Deferred Income Taxes 17.6
 18.3
Deferred Compensation 10.0
 10.0
Total Liabilities 260.6
 285.9
Shareholders' Equity:  
  
Common Stock, $0.50 par value, 100,000,000 shares authorized, 38,333,576 and 38,198,353 shares issued as of July 28, 2018 and April 28, 2018, respectively 19.2
 19.1
Additional Paid-in Capital 138.5
 136.5
Accumulated Other Comprehensive Income (Loss) (4.0) 13.9
Treasury Stock, 1,346,624 shares as of July 28, 2018 and April 28, 2018 (11.5) (11.5)
Retained Earnings 490.0
 472.0
Total Shareholders' Equity 632.2
 630.0
Total Liabilities and Shareholders' Equity $892.8
 $915.9
  July 27,
2019		 April 27,
2019
  (Unaudited)  
ASSETS  
  
CURRENT ASSETS  
  
Cash and Cash Equivalents $73.8
 $83.2
Accounts Receivable, Net 233.1
 219.3
Inventories 122.0
 116.7
Income Tax Receivable 13.4
 14.3
Prepaid Expenses and Other Current Assets 19.0
 20.0
TOTAL CURRENT ASSETS 461.3
 453.5
LONG-TERM ASSETS    
Property, Plant and Equipment, Net 196.4
 191.9
Goodwill 233.0
 233.3
Other Intangible Assets, Net 260.4
 264.9
Operating Lease Assets, Net 26.1
 —
Deferred Tax Assets 34.1
 34.3
Pre-production Costs 36.5
 32.8
Other Long-term Assets 21.1
 21.0
TOTAL LONG-TERM ASSETS 807.6
 778.2
TOTAL ASSETS $1,268.9
 $1,231.7
     
LIABILITIES & SHAREHOLDERS' EQUITY  
  
CURRENT LIABILITIES  
  
Accounts Payable $90.7
 $91.9
Accrued Employee Liabilities 17.9
 20.1
Other Accrued Expenses 35.8
 33.9
Short-term Operating Lease Liability 6.2
 —
Short-term Debt 15.4
 15.7
Income Tax Payable 14.8
 19.3
TOTAL CURRENT LIABILITIES 180.8
 180.9
LONG-TERM LIABILITIES    
Long-term Debt 267.7
 276.9
Long-term Operating Lease Liability 20.6
 —
Long-term Income Tax Payable 32.4
 33.0
Other Long-term Liabilities 16.7
 14.8
Deferred Tax Liabilities 36.4
 36.4
TOTAL LONG-TERM LIABILITIES 373.8
 361.1
TOTAL LIABILITIES 554.6
 542.0
SHAREHOLDERS' EQUITY  
  
Common Stock, $0.50 par value, 100,000,000 shares authorized, 38,438,111 shares and 38,333,576 shares issued as of July 27, 2019 and April 27, 2019, respectively 19.2
 19.2
Additional Paid-in Capital 152.9
 150.4
Accumulated Other Comprehensive Loss (15.2) (13.6)
Treasury Stock, 1,346,624 shares as of July 27, 2019 and April 27, 2019 (11.5) (11.5)
Retained Earnings 568.9
 545.2
TOTAL SHAREHOLDERS' EQUITY 714.3
 689.7
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,268.9
 $1,231.7
See notes to condensed consolidated financial statements.

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
(in millions, except share data)
 
Common
Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other Comprehensive
Loss
 
Treasury
Stock
 Retained Earnings Total Shareholders Equity
Balance as of April 27, 201938,333,576
 $19.2
 $150.4
 $(13.6) $(11.5) $545.2
 $689.7
Earned Portion of Restricted Stock, Net of Tax Withholding104,535
 —
 —
 —
 —
 (0.4) (0.4)
Stock-based Compensation Expense—
 —
 2.5
 —
 —
 —
 2.5
Foreign Currency Translation Adjustments—
 —
 —
 (1.6) —
 —
 (1.6)
Net Income—
 —
 —
 —
 —
 28.3
 28.3
Dividends on Common Stock—
 —
 —
 —
 —
 (4.2) (4.2)
Balance as of July 27, 201938,438,111
 $19.2
 $152.9
 $(15.2) $(11.5) $568.9
 $714.3
 
Common
Stock
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other Comprehensive
Income (Loss)
 
Treasury
Stock
 Retained Earnings Total Shareholders Equity
Balance as of April 28, 201838,198,353
 $19.1
 $136.5
 $13.9
 $(11.5) $472.0
 $630.0
Earned Portion of Restricted Stock, Net of Tax Withholding135,223
 0.1
 (0.1) —
 —
 (1.7) (1.7)
Stock-based Compensation Expense—
 —
 2.1
 —
 —
 —
 2.1
Adoption of ASU 2014-09—
 —
 —
 —
 —
 0.1
 0.1
Foreign Currency Translation Adjustments—
 —
 —
 (17.9) —
 —
 (17.9)
Net Income—
 —
 —
 —
 —
 23.7
 23.7
Dividends on Common Stock—
 —
 —
 —
 —
 (4.1) (4.1)
Balance as of July 28, 201838,333,576
 $19.2
 $138.5
 $(4.0) $(11.5) $490.0
 $632.2

See notes to condensed consolidated financial statements.

METHODE ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in millions)
  Three Months Ended
  July 28,
2018		 July 29,
2017
Operating Activities:  
  
Net Income $23.7
 $20.5
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:  
  
Provision for Depreciation 6.5
 5.0
Amortization of Intangible Assets 1.9
 0.6
Stock-based Compensation 2.0
 4.1
Change in Deferred Income Taxes (0.4) —
Changes in Operating Assets and Liabilities:    
Accounts Receivable 6.4
 15.1
Inventories (6.1) (1.5)
Prepaid Expenses and Other Assets (3.3) (9.1)
Accounts Payable and Other Expenses (10.7) (11.1)
Net Cash Provided by Operating Activities 20.0
 23.6
Investing Activities:  
  
Purchases of Property, Plant and Equipment (18.2) (8.0)
Acquisition of Business, Net of Cash Acquired —
 (22.2)
Sale of Business/Investment/Property —
 0.3
Net Cash Used in Investing Activities (18.2) (29.9)
Financing Activities:  
  
Taxes Paid Related to Net Share Settlement of Equity Awards (1.7) (0.3)
Cash Dividends (4.1) (3.4)
Repayment of Borrowings (3.6) (2.0)
Net Cash Used in Financing Activities (9.4) (5.7)
Effect of Foreign Currency Exchange Rate Changes on Cash (10.0) 15.9
Increase (Decrease) in Cash and Cash Equivalents (17.6) 3.9
Cash and Cash Equivalents at Beginning of Year 246.1
 294.0
Cash and Cash Equivalents at End of Period $228.5
 $297.9
  Three Months Ended
  July 27,
2019		 July 28,
2018
OPERATING ACTIVITIES  
  
Net Income $28.3
 $23.7
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:  
  
Change in Cash Surrender Value of Life Insurance (0.3) (0.4)
Amortization of Debt Issuance Costs 0.2
 —
Depreciation 7.0
 6.5
Amortization of Intangible Assets 4.8
 1.9
Stock-based Compensation Expense 2.5
 2.1
Change in Deferred Income Taxes —
 (0.4)
Changes in Operating Assets and Liabilities:    
Accounts Receivable (12.8) 6.4
Inventories (5.7) (6.1)
Prepaid Expenses and Other Assets 0.7
 (2.9)
Accounts Payable and Other Liabilities (5.6) (10.8)
NET CASH PROVIDED BY OPERATING ACTIVITIES 19.1
 20.0
     
INVESTING ACTIVITIES  
  
Purchases of Property, Plant and Equipment (13.2) (18.2)
NET CASH USED IN INVESTING ACTIVITIES (13.2) (18.2)
     
FINANCING ACTIVITIES  
  
Taxes Paid Related to Net Share Settlement of Equity Awards (0.4) (1.7)
Repayments of Finance Leases (0.2) —
Cash Dividends (4.1) (4.1)
Proceeds from Borrowings 1.0
 —
Repayments of Borrowings (10.7) (3.6)
NET CASH USED IN FINANCING ACTIVITIES (14.4) (9.4)
Effect of Foreign Currency Exchange Rate Changes on Cash and Cash Equivalents (0.9) (10.0)
DECREASE IN CASH AND CASH EQUIVALENTS (9.4) (17.6)
Cash and Cash Equivalents at Beginning of the Year 83.2
 246.1
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $73.8
 $228.5
See notes to condensed consolidated financial statements.






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METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)




1.BASIS OF PRESENTATIONDescription of Business and Summary of Significant Accounting Policies
Description of Business

Methode Electronics, Inc. was incorporated(the "Company" or "Methode") is a global manufacturer of component and subsystem devices with manufacturing, design and testing facilities in 1946 as an Illinois corporationBelgium, Canada, China, Egypt, Germany, India, Italy, Lebanon, Malta, Mexico, the Netherlands, Singapore, Switzerland, the United Kingdom and reincorporatedthe United States. The Company's primary manufacturing facilities are located in Delaware in 1966.  As used herein, “we,” “us,” “our,” the “Company” or “Methode” means Methode Electronics, Inc.Dongguan and its subsidiaries.  Our business is managed,Shanghai, China; Cairo, Egypt; Mriehel, Malta; and our financial results are reported, on a segment basis, with those segments being Automotive, Interface, Power ProductsFresnillo and Other.Monterrey, Mexico. The Company designs, manufactures and markets devices employing electrical, radio remote control, electronic, LED lighting, wireless and sensing technologies.

Basis of Presentation

The unaudited condensed consolidated financial statements and related disclosures as of July 28, 2018 and results of operations for the three months ended July 28, 2018 and July 29, 2017 are unaudited, pursuant toCompany have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).  The April 28, 2018 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAPaccounting principles generally accepted in the United States ("GAAP") have been condensed or omitted pursuant to such rules and regulations. In our opinion, theseThese interim condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments)adjustments, except as otherwise disclosed) that management believes are necessary for thea fair statementpresentation of the results of operations, financial position and cash flows of the Company for the interim periods.periods presented. These financial statements should be read in conjunction with the consolidated financial statements included in ourthe Company's Form 10-K for the year ended April 28, 2018,27, 2019, filed with the SEC on June 21, 2018.20, 2019. Results may vary from quarter-to-quarter for reasons other than seasonality.

2.RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTSFinancial Reporting Periods
The Company maintains its financial records on the basis of a 52 or 53 week fiscal year ending on the Saturday closest to April 30. The three months ended July 27, 2019 and July 28, 2018 were both 13-week periods.
Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Actual results could differ from these estimates.

Change in Presentation

During the second quarter of fiscal 2019, the Company changed its reportable segments. Refer to Note 11 “Segment Information,” for further discussion on the impact of the change.

Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 1, "Description of Business and Summary of Significant Accounting Policies," to the consolidated financial statements included in the Company's Form 10-K for the year ended April 27, 2019. There have been no material changes to the significant accounting policies in the three months ended July 27, 2019 other than those noted below.

Recently Adopted Accounting Pronouncements

In February 2018,2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, “Leases,” which amended authoritative guidance on leases and is codified in Accounting Standards Codification ("ASC") 842. The amended guidance requires entities to record most leased assets and liabilities on the balance sheet, and also retains a dual model approach for assessing lease classification and recognizing expense. The FASB subsequently issued updates to provide clarification on specific topics, including adoption guidance, practical expedients and interim transition disclosure requirements.


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Table of Contents
METHODE ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The Company adopted the standard on April 28, 2019, by applying the modified retrospective method without restatement of comparative periods' financial information, as permitted by the transition guidance. Accordingly, the Company has provided disclosures required by prior lease guidance for comparative periods. The adoption of this standard resulted in the recognition of right-of-use assets of $27.6 million and related lease obligations of $28.1 million as of April 28, 2019. The standard did not have a significant impact on the Company's operating results or cash flows.

The Company elected certain practical expedients, including the election not to reassess its prior conclusions about lease identification, lease classification and initial direct costs, as well as the election not to separate lease and non-lease components for arrangements where the Company is a lessee. Lastly, the Company elected to recognize a right-of-use asset and related lease liability for leases with a lease term of 12 months or less for all classes of underlying assets. The Company determines if an arrangement contains a lease at inception. Operating lease expense is recognized on a straight-line basis over the lease term.

For purposes of calculating operating lease obligations under the standard, the Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such option. The Company's leases do not contain material residual value guarantees or material restrictive covenants. The discount rate used to measure a lease obligation should be the rate implicit in the lease; however, the Company’s operating leases generally do not provide an implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement to determine the present value of lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest a lessee would pay to borrow on a collateralized basis over a similar term with similar payments. Refer to Note 3, "Leases," for additional information.

In February 2018, the FASB issued ASU No. 2018-02, "Income Statement—ReportingStatement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." The amendments in this update are intended to address a specific consequence of the Tax Cuts and Jobs Act (“U.S. Tax Reform”) by allowingallow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from U.S. Tax Reform’s reduction of the U.S. federal corporate income tax rate. The Company adopted ASU is effective for all entities for annual periods beginning after December 15, 2018, with early adoption permitted, and is to be applied either in the period2018-02 as of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate is recognized. For Methode, the amendments in this update will be effective for our fiscal 2020, beginning on April 28, 2019. Management does not expect this ASU to have a material2019 and the adoption had no impact on the Company’s consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

In FebruaryJune 2016, the FASB issued ASU No. 2016-02, "Leases (ASC 842),"2016-13, “Financial Instruments-Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” The guidance in ASU 2016-13 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. It replaces the existing incurred loss impairment model with an expected loss methodology, which sets out the principleswill result in more timely recognition of credit losses. The standard will be effective for the recognition, measurement, presentation and disclosureCompany in the first quarter of leases for both parties to a contract (i.e. lessees and lessors). Thefiscal 2021. Management is currently assessing the impact of the new standard, requires lessors to account for leases using an approachbut does not anticipate that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The newthe adoption of this standard requires lessees to applywill have a dual approach, classifying leases as either finance or operating leases basedmaterial impact on the principlemanner in which it estimates the allowance for doubtful accounts on its trade accounts receivable.

In August 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The guidance in ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, and earlier adoption is permitted including adoption in any interim period. The Company is evaluating the impact of whether or notadopting this new accounting guidance on its consolidated financial statements.

In August 2018, the lease is effectively a financed purchase byFASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) – Disclosure
Framework – Changes to the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the termDisclosure Requirements for Fair Value Measurement." The guidance in ASU 2018-13 changes disclosure requirements related to fair value measurements as part of the lease. A lesseedisclosure framework project. The disclosure framework project aims to improve the effectiveness of disclosures in the notes to the financial statements by focusing on requirements that clearly communicate the most important information to users of the financial statements. This guidance is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. Accounting Standards Codification ("ASC") 842 supersedes the previous leases standard, ASC 840 Leases. The amendments in this update are effective for fiscal years beginning after December 15, 2018, which2019, with early adoption permitted. The Company is our fiscal 2020, beginning on April 28, 2019. This ASU is required to be applied with a modified retrospective approach and requires applicationevaluating the provisions of the new standard at the beginning of the earliest comparative period presented.

In July 2018, the FASB issued ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements." In issuing ASU No. 2018-11, the FASB decided to provide another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption dateupdated guidance and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We are currently evaluatingassessing the impact that ASU 2016-02 and ASU 2018-11 will have on our condensedits consolidated financial statements.


RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which created ASC 606 “Revenue from Contracts with Customers” (“ASC 606”) and supersedes the revenue recognition requirements in ASC 605 “Revenue Recognition” (“ASC 605”). The guidance in ASU No. 2014-09 and subsequently issued amendments outlines a comprehensive model for all entities to use in accounting for revenue arising from contracts with customers as well as required disclosures. Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)


services.  The new standard requires additional disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers including significant judgments and changes in judgments. We adopted the new standard effective April 29, 2018 using the modified retrospective transition method with the cumulative effect recorded to the opening balance of retained earnings as of the date of adoption. See Note 3, "Revenue" for further details.

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." The new standard requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The standard was adopted by Methode on April 29, 2018 and did not have a material impact on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” The amendments in this update provide guidance on eight specific cash flow presentation issues that have developed due to diversity in practice. The issues include, but are not limited to, debt prepayment or extinguishment costs, contingent consideration payments made after a business combination, and proceeds from the settlement of insurance claims. The amendments in this ASU, where practicable, are to be applied retrospectively. The standard was adopted by Methode on April 29, 2018 and did not have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting." The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The standard was adopted by Methode on April 29, 2018 and did not have a material impact on our consolidated financial statements.
3.REVENUE
The Company is a global manufacturer of component and subsystem devices whose components are found in the primary end-markets of the aerospace, appliance, automotive, construction, consumer and industrial equipment, communications (including information processing and storage, networking equipment and wireless and terrestrial voice/data systems), medical, rail and other transportation industries. On April 29, 2018, we adopted ASC 606 along with the related amendments using a modified retrospective approach to all contracts open as of that date. Upon adoption, we recognized a $0.1 million increase to opening retained earnings. This adjustment was a result of modifying our revenue recognition pattern for highly customized goods with no alternative use to over time recognition instead of point in time and for deferring revenue related to material rights that we provide to our customers. The overall impact to our financial statements was immaterial. We have modified our controls to address the risks present under ASC 606.

As we have adopted ASC 606 using the modified retrospective approach, our prior periods have not been restated, and as such they are presented under ASC 605. The impact of the changes in accounting policy on our first quarter of fiscal 2019 is provided below.
  Impact of Changes in Accounting Policies
(Dollars in Millions) As Reported Adjustments Balance Under ASC 605
Net Sales $223.4
 $(7.1) $230.5
Cost of Products Sold $163.3
 $(7.2) $170.5
Total Inventories $88.5
 $(0.7) $89.2
Contract Assets $1.0
 $1.0
 $—
Contract Liabilities $0.2
 $0.2
 $—
Retained Earnings $490.0
 $0.1
 $489.9

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

2.Revenue Accounting Policy:

In May 2014, the FASB issued ASC 606, which supersedes the revenue recognition requirements in ASC 605, and requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.

The Company adopted ASC 606 as of April 29, 2018 using the modified retrospective transition method. The cumulative effect of initially applying the new standard was recorded as an adjustment to the opening balance of retained earnings within our condensed consolidated balance sheets.  In accordance with the modified retrospective transition method, the historical information within the financial statements has not been restated and continues to be reported under the accounting standard in effect for those periods. As a result, the Company has disclosed the accounting policies in effect prior to April 29, 2018, as well as the policies it has applied starting April 29, 2018.

Periods prior to April 29, 2018
Revenue is recognized in accordance with ASC 605.  Revenue is recognized upon either shipment or delivery (depending on shipping terms) of product to customers and is recorded net of returns, allowances, customer discounts, and incentives.  Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis.

Periods commencing April 29, 2018
The majority of ourthe Company's revenue is recognized at a point in time.  The Company has determined that the most definitive demonstration that control has transferred to a customer is physical shipment or delivery, depending on the contractual shipping terms, with the exception of consignment transactions. Consignment transactions are arrangements where the Company transfers product to a customer location but retains ownership and control of such product until it is used by the customer. Revenue for consignment arrangements is recognized upon the customer’s usage.


Revenues associated with products which we believethe Company believes have no alternative use, and where the Company has an enforceable right to payment, are recognized on an over time basis.  In transition to ASC 606, the Company noted some customers ordered highly customized parts, in which the Company was entitled to payment throughout the manufacturing process. In accordance with ASC 606, the Company has begun recognizing revenue over time for these customers as the performance obligation is satisfied.  The Company believes the most faithful depiction of the transfer of goods to the customer is based on progress to date, which is typically smooth throughout the production process. As such, the companyCompany recognizes revenue evenly over the production process through transfer of control to the customer.


In addition, customers typically negotiate annual price downs. Management has evaluated these price downs and determined that in some instances, these price downs give rise to a material right. In instances that a material right exists, a portion of the transaction price is allocated to the material right and recognized over the life of the contract.

Our warranties are standard, assurance-type warranties only. We do not offer any additional service or extended term warranties to our customers. As such, we continue to recognize warranty as an expense with accounting outside of the scope of ASC 606.


The Company has elected to treattreats shipping and handling costs as an activity necessary to fulfill the performance obligation to transfer product to the customer and not as a separate performance obligation. Shipping and handling costs are estimated at quarter endquarter-end in proportion to revenue recognized for transactions where actual costs are not yet known.


Across all products, the amount of revenue recognized corresponds to the related purchase order. Revenue is adjusted for variable consideration (such as discounts) as described further below. Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue.

The Company’s performance obligations are typically short-term in nature. As a result, the Company has elected the practical expedient that provides an exemption of the disclosure requirements regarding information about remaining performance obligations on contracts that have original expected durations of one year or less.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

Costs to Fulfill/Obtain a Contract:

We incur pre-production tooling costs related to products produced for our customers under long-term supply agreements. We had $23.4 million and $20.5 million as of July 28, 2018 and April 28, 2018, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the customer has provided a non-cancelable right to use the tooling. These costs are capitalized and recognized into income upon acceptance. The Company concluded that pre-production tooling and engineering costs do not represent a promised good or service under ASC 606, and as such, reimbursements received are accounted for as a reimbursement of the expense, not revenue. This change resulted in tooling reimbursements of $7.3 million being recorded into cost of products sold during the three months ended July 28, 2018.

The Company has not historically incurred material costs to obtain a contract. In the instances that costs to obtain contracts are incurred, the Company will capitalize and amortize those over the life of the contract.


Contract Estimates:
Due to the nature of the work performed in completing certain performance obligations, the estimation of both total revenue and cost at completion includes a number of variables and requires significant judgment.

Estimating total contract revenue may require judgment as certain contracts contain pricing discount structures, early payment discounts or other provisions that can impact the transaction price. The Company generally estimates variable consideration utilizing the most likely amount to which we expect to be entitled. When the contract provides the customer with the right to return eligible products, the Company reduces revenue at the point of sale using current facts and historical experience by using an estimate for expected product returns. The Company adjusts these estimates at the earlier of when the most likely amount of consideration that is expected to be received changes or when the consideration becomes fixed. Accordingly, an increase or decrease to revenue is recognized at that time. The Company has elected the practical expedient for significant financing components, allowing the Company to not adjust the promised amount of consideration for the effects of a financing component when payment terms are within one year from the time a performance obligation is satisfied. Our customers' payment terms are typically 30-45 days from the time control transfers.

Certain of the Company's contracts contain annual contractually-guaranteed price reductions that grant the customer the right to purchase products at decreased prices throughout the life of the contract. Most of these contractual price reductions are merely the result of efficiencies in the production process being passed down to our customers. For certain of these price reductions, however, the amount of the reduction cannot be attributed entirely to production efficiencies gained. In these cases, the annual price-downs are considered to be material rights as the customer, as part of their current contract, is purchasing an option that they would not have received without the contract to purchase future product. When a contract contains a material right, a portion of the transaction price is allocated to the material right for which revenue recognition is deferred until the customer exercises its option. The standalone selling price for a material right used to allocate the transaction price is determined at contract inception by calculating the portion of the option purchased relative to the estimated total amount of incremental value the customer will likely earn, based on historical data, customer forecast communications, current economic information and industry trends. The standalone selling price of a material right is not adjusted prior to customer exercise or option expiration.

Estimating the total expected costs related to contracts also requires significant judgment. In cases where the Company is recognizing revenue over time, it is required to record a proportionate amount of the costs of production as well. As part of this process, management considers the progress towards completion of the performance obligation, the length of time necessary to complete the performance obligation and the historical costs incurred in the manufacture of similar products, among other variables.
The Company has elected the portfolio approach practical expedient to estimate the amount of revenue to recognize for certain contracts which require over time revenue recognition. Such contracts are grouped together either by revenue stream, customer or product. Each portfolio of contracts is grouped together based on having similar characteristics. The portfolio approach is utilized only when the result of the accounting is not expected to be materially different than if applied to individual contracts. For each portfolio of contracts, the respective work in process and/or finished goods inventory balances are identified and the portfolio-specific margin is applied to estimate the pro-rata portion of revenue earned in relation to the costs incurred.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

Adjustments due to any of the factors above to net sales, cost of sales and the related impact to operating income are recognized as necessary in the period they become known. The resultant impacts from these changes in estimates are recognized on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on both current and prior periods.
Contract Balances:Balances
    
The Company receives payment from customers based on the contractual billing schedule and specific performance requirements established in the contract. Billings are recorded as accounts receivable when an unconditional right to the contractual consideration exists. A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer. A contract liability exists when the Company has received consideration or the amount is due from the customer in advance of revenue recognition. Contract assets and contract liabilities are recognized in prepaid expenses and other current assets and other long-term liabilities, respectively, in the Company's condensed consolidated balance sheets.


Unbilled Receivables (Contract Assets) - Pursuant to the over time revenue recognition model, revenue may be recognized prior to the customer being invoiced. An unbilled receivable is recorded to reflect revenue that is recognized over time. The Company has determined that unbilledUnbilled receivables were $0.8 million and $1.0 million as of both July 27, 2019 and April 29, 2018 and July 28, 2018, respectively. During27, 2019. In the three months ended July 28, 2018,27, 2019, $0.8 million of previously unbilled receivables were recorded into accounts receivable. There were no impairments of contract assets as of July 28, 2018.27, 2019.


Deferred Revenue (Contract Liabilities) - For certain of the price reductions offered by the Company, the amount of the reduction cannot be attributed entirely to production efficiencies gained. In these cases, the annual price-downs are considered to be material rights as the customer, as part of their current contract, are purchasing an option that they would not have received without the contract to purchase future product. When a contract contains a material right, a portion of the transaction price is allocated to the material right for which revenue recognition is deferred until the customer exercises its option. Deferred revenue was $0.2$0.3 million atas of both July 27, 2019 and April 29, 2018 and July 28, 2018.27, 2019. No previously deferred revenue was recorded into revenue duringin the period.three months ended July 27, 2019.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Disaggregated Revenue Information:Information


The Company views the following disaggregated disclosures as useful to understanding the composition of revenue recognized during the respective reporting periods. Geographic net sales are determined based on our sales from ourthe Company's various operational locations.  Though revenue recognition patterns and contracts are generally consistent, the amount, timing and uncertainty of revenue and cash flows may vary in each reportable segment due to geographic and economic factors.

 Three Months Ended July 28, 2018 Three Months Ended July 27, 2019
 Auto Interface Power Other Total
(Dollars in Millions) Auto Industrial Interface Medical Total
Geographic Net Sales:                    
U.S. $77.3
 $19.4
 $7.7
 $0.3
 $104.7
 $100.0
 $42.5
 $12.5
 $0.3
 $155.3
Malta 30.5
 6.1
 2.3
 —
 38.9
 27.5
 7.5
 0.1
 —
 35.1
Canada 21.5
 6.4
 —
 —
 27.9
China 20.0
 0.1
 8.8
 —
 28.9
 15.6
 9.5
 —
 —
 25.1
Canada 20.8
 —
 —
 —
 20.8
Egypt 12.7
 —
 —
 —
 12.7
Belgium 8.3
 —
 —
 —
 8.3
Other 5.7
 3.4
 —
 —
 9.1
 21.6
 4.9
 0.3
 —
 26.8
Total Net Sales $175.3
 $29.0
 $18.8
 $0.3
 $223.4
 $186.2
 $70.8
 $12.9
 $0.3
 $270.2
                    
                    
Timing of Revenue Recognition:                    
Goods Transferred at a Point in Time $165.5
 $29.0
 $18.8
 $0.3
 $213.6
 $179.0
 $70.8
 $12.9
 $0.3
 $263.0
Goods Transferred Over Time 9.8
 —
 —
 —
 9.8
 7.2
 —
 —
 —
 7.2
Total Net Sales $175.3
 $29.0
 $18.8
 $0.3
 $223.4
 $186.2
 $70.8
 $12.9
 $0.3
 $270.2


  Three Months Ended July 28, 2018
(Dollars in Millions) Auto Industrial Interface Medical Total
Geographic Net Sales:          
U.S. $77.3
 $12.1
 $15.0
 $0.3
 $104.7
Malta 30.5
 8.3
 0.1
 —
 38.9
China 20.0
 8.8
 —
 —
 28.8
Canada 20.8
 —
 —
 —
 20.8
Other 26.7
 3.0
 0.5
 —
 30.2
Total Net Sales $175.3
 $32.2
 $15.6
 $0.3
 $223.4
           
           
Timing of Revenue Recognition:          
Goods Transferred at a Point in Time $165.5
 $32.2
 $15.6
 $0.3
 $213.6
Goods Transferred Over Time 9.8
 —
 —
 —
 9.8
Total Net Sales $175.3
 $32.2
 $15.6
 $0.3
 $223.4


3.Leases

The Company leases real estate, automobiles and certain equipment under both operating and finance leases. The Company does not have any significant arrangements where it is the lessor. The majority of the Company's global lease portfolio represents leases of real estate, such as manufacturing facilities, warehouses and buildings. The Company's leases have remaining lease terms up to 12 years, some of which include optional renewals or terminations, which are considered in the Company’s assessments when such options are reasonably certain to be exercised. Any variable payments related to the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts
lease will be recorded as lease expense when and as incurred. The Company’s lease payments are largely fixed. As of July 27, 2019, the operating leases that the Company has signed but have not yet commenced are immaterial.

In addition to the operating lease assets presented on the condensed consolidated balance sheets, assets under finance leases of $0.9 million are included in millions, except per share data)property, plant and equipment, net on the condensed consolidated balance sheets as of July 27, 2019. The finance lease obligation is split between other accrued expenses for the short-term portion and other long-term liabilities for the long-term portion on the condensed consolidated balance sheets. The Company had an immaterial amount of finance lease expense in the three months ended July 27, 2019.

The components of lease expense were as follows:
(Dollars in Millions) Three Months Ended July 27, 2019
Lease Cost:  
Operating Lease Cost $2.5
Variable Lease Cost 0.2
Total Lease Cost $2.7


Supplemental cash flow and other information related to operating leases was as follows:
(Dollars in Millions) Three Months Ended July 27, 2019
Operating Cash Flows:  
Cash Paid Related to Operating Lease Obligations $2.1
   
Non-cash Activity:  
Right-of-use Assets Obtained in Exchange for Lease Obligations $0.5
   
Weighted-average Remaining Lease Term 6.0 years
Weighted-average Discount Rate 4.64%


Maturities of operating lease liabilities as of July 27, 2019, are shown below:
(Dollars in Millions) Operating Leases
Fiscal Year:  
Remainder of 2020 $5.8
2021 5.5
2022 5.0
2023 4.3
2024 3.1
Thereafter 7.4
Total Lease Payments 31.1
Less: Imputed Interest (4.3)
Present Value of Lease Liabilities $26.8



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


Disclosures related to periods prior to the adoption of ASC 842

Total rent expense was $1.6 million in the three months ended July 28, 2018. Future minimum lease payments for assets under operating leases as of April 27, 2019 were as follows:
(Dollars in Millions) Operating Leases
Fiscal Years:  
2020 $7.8
2021 5.6
2022 4.9
2023 4.2
2024 3.3
Thereafter 8.4
Net Minimum Lease Payments $34.2


4.    ACQUISITIONSAcquisition
Fiscal 2018 AcquisitionsAcquisition of Grakon

Procoplast S.A.


On July 27, 2017, weSeptember 12, 2018, the Company acquired 100% of the stock of Procoplast S.A.Grakon Parent, Inc. ("Procoplast"Grakon") for $22.2$422.1 million in cash, net of cash acquired. The business, located near the Belgian-German border,headquartered in Seattle, Washington, is an independenta manufacturer of automotive assemblies.custom designed lighting solutions and highly styled engineered components. Grakon’s manufacturing capabilities and products help diversify the Company's product offerings and expand the Industrial segment, which is a key component of the Company's strategic direction. The accounts and transactions of ProcoplastGrakon have been included in the Automotive segmentand Industrial segments in the condensed consolidated financial statements from the effective date of the acquisition. For goodwill impairment testing purposes, Procoplast

The Company has been included innot yet completed the process of estimating the fair value of the assets acquired and liabilities assumed. Accordingly, the Company's European Automotive reporting unit.

During the fourth quarter of fiscal 2018, the Company completedpreliminary estimates and the allocation of the purchase price to the assets acquired and liabilities assumed.assumed may change as the Company completes the process, which would likely impact the Company's allocation of the purchase price to goodwill. The finalprimary fair value estimates considered preliminary are contingencies and income tax-related items. Based on the Company's preliminary allocation of the purchase price, revised as of July 27, 2019, goodwill decreased $0.4 million from the preliminary amount reported in the Company's consolidated financial statements as of April 27, 2019. The revised preliminary allocation of the purchase price to the fair values of the assets acquired and liabilities assumed was:were:
(Dollars in Millions)  
Cash $6.9
Accounts Receivable 36.1
Inventory 30.8
Prepaid Expenses and Other Current Assets 1.6
Other Intangible Assets 221.9
Goodwill 174.9
Pre-production Costs 1.5
Property, Plant and Equipment 16.2
Accounts Payable (19.4)
Accrued Employee Liabilities (4.4)
Other Accrued Expenses (7.6)
Income Tax Payable (0.3)
Deferred Income Tax Liability (29.2)
Total Purchase Price $429.0


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in Millions)  
Cash $1.3
Accounts Receivable 7.4
Inventory 3.5
Intangible Assets 19.2
Goodwill 6.8
Pre-Production Costs 2.3
Property, Plant and Equipment 23.8
Accounts Payable (4.9)
Salaries, Wages and Payroll Taxes (0.8)
Other Accrued Expenses (0.7)
Income Taxes Payable (0.6)
Short-term Debt (3.2)
Other Liabilities (2.1)
Long-term Debt (20.6)
Deferred Income Tax Liability (7.9)
Total Purchase Price $23.5



The following table presents details of the intangible assets acquired:
(Dollars in Millions) Fair Value at Date of Acquisition Amortization Period
Customer Relationships and Agreements - Significant Customer $57.0
 19.5 years
Customer Relationships and Agreements - All Other Customers 125.0
 19.5 years
Technology Licenses 17.7
 11.7 years
Trade Names 22.2
 8.5 years
Total $221.9
  

(Dollars in Millions) Fair Value at Date of Acquisition Amortization Period
Customer Relationships and Agreements - Significant Customer $12.3
 17.0 years
Customer Relationships and Agreements - All Other Customers 2.8
 11.5 years
Technology Licenses 2.1
 8.5 years
Trade Names 2.0
 8.5 years
Total $19.2
  


Acquisition-related costs of $1.1$0.6 million were incurred in relation to the acquisition of Procoplast forGrakon in the three months ended July 29, 2017, all of28, 2018, which have been reported in selling and administrative expenses on the condensed consolidated statements of operations.income.

Pacific Insight Electronics Corp.
On October 3, 2017, we acquired 100% of the outstanding common shares of Pacific Insight Electronics Corp. ("Pacific Insight") in a cash transaction for $108.7 million, net of cash acquired. Pacific Insight, headquartered in Vancouver,

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(Dollar amounts in millions, except per share data)

British Columbia, Canada, is a global solutions provider offering design, development, manufacturing and delivery of lighting and electronic products and full-service solutions to the automotive and commercial vehicle markets, and has manufacturing facilities in both Canada and Mexico. Its technology in LED-based ambient and direct lighting will expand our presence within the automotive interior, as well as augment our efforts in overhead console and other areas. The accounts and transactions of Pacific Insight have been included in the Automotive segment in the consolidated financial statements from the effective date of the acquisition. For goodwill impairment testing purposes, Pacific Insight has been included in the Company's North American Automotive reporting unit.

During the fourth quarter of fiscal 2018, the Company completed the allocation of the purchase price to the assets acquired and liabilities assumed. The final allocation of the purchase price to the fair values of the assets acquired and liabilities assumed was:
(Dollars in Millions)  
Cash $4.9
Accounts Receivable 18.3
Inventory 13.0
Prepaid Expenses and Other Current Assets 0.3
Income Taxes Receivable 1.2
Intangible Assets 40.1
Goodwill 50.4
Pre-production Costs 0.8
Property, Plant and Equipment 13.2
Accounts Payable (7.9)
Salaries, Wages and Payroll Taxes (0.8)
Other Accrued Expenses (2.9)
Short-term Debt (0.8)
Long-term Debt (3.4)
Deferred Income Tax Liability (12.8)
Total Purchase Price $113.6

The following table presents details of the intangible assets acquired:
(Dollars in Millions) Fair Value at Date of Acquisition Amortization Period
Customer Relationships and Agreements - Automotive $22.6
 11.0 years
Customer Relationships and Agreements - Commercial 9.6
 13.0 years
Trade Names 6.2
 7.5 years
Technology Licenses 1.7
 5.5 years
Total $40.1
  


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

The following table presents the unaudited supplemental pro forma results for the three months ended July 29, 2017. The unaudited pro forma financial information combines28, 2018 as if the results of operations of Methode and Pacific Insight as though the companiesGrakon acquisition had been combinedoccurred as of the beginning of fiscal 2017.2018. The unaudited pro forma information is presented for information purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at such time. The unaudited pro forma results presented below primarily include amortization charges for acquired intangible assets, depreciation adjustments for property, plant and equipment that has been revalued, interest expense adjustments due to an increased debt level, adjustments for certain acquisition-related charges and related tax effects.
 (Unaudited)
(Dollars in Millions) Three Months Ended July 28, 2018
Net Sales $270.7
Net Income $29.7

  (Unaudited)
  Three Months Ended
(Dollars in Millions) July 29,
2017
Revenues $224.7
Net Income $22.0

Acquisition-related costs of $1.5 million were incurred in relation to the acquisition of Pacific Insight for the three months ended July 29, 2017, all of which have been reported in selling and administrative expenses on the condensed consolidated statements of income.


5.GOODWILL AND INTANGIBLE ASSETS
We review our goodwill and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and at least annually in accordance with ASC No. 350, "Intangibles — Goodwill and Others."  The values assigned to goodwill and intangible assets are normally based on estimates and judgments regarding expectations for the success and life cycle of products and technologies acquired.  A severe decline in expectations could result in significant impairment charges, which could have a material adverse effect on our financial condition and results of operations.
As part of the acquisitions of Procoplast and Pacific Insight in fiscal 2018, the Company recorded goodwill of $6.8 million and $50.4 million, respectively, of which none is deductible for income taxes. The following table shows the roll-forward of goodwill in the financial statements as of July 28, 2018.
  Automotive Interface 
Power
Products
 Total
Balance as of April 28, 2018 $57.5
 $0.7
 $1.0
 $59.2
Goodwill Acquired —
 —
 —
 —
Foreign Currency Translation (0.4) —
 —
 (0.4)
Balance as of July 28, 2018 $57.1
 $0.7
 $1.0
 $58.8

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

As part of the acquisitions of Procoplast and Pacific Insight in fiscal 2018, the Company acquired estimated intangible assets of $19.2 million and $40.1 million, respectively. The following tables present details of the Company’s intangible assets.
  As of July 28, 2018
  Gross Accumulated Amortization Net Wtd. Avg. Remaining Amortization Periods (Years)
Customer Relationships and Agreements $63.3
 $19.0
 $44.3
 12.1
Trade Names, Patents and Technology Licenses 37.7
 23.8
 13.9
 5.2
Total $101.0
 $42.8
 $58.2
  
  As of April 28, 2018
  Gross Accumulated Amortization Net Wtd. Avg. Remaining Amortization Periods (Years)
Customer Relationships and Agreements $64.4
 $18.1
 $46.3
 12.3
Trade Names, Patents and Technology Licenses 37.7
 23.0
 14.7
 5.3
Total $102.1
 $41.1
 $61.0
  
The estimated aggregate amortization expense for the current fiscal year and each of the four succeeding fiscal years is as follows:
2019 $7.5
2020 $5.5
2021 $5.4
2022 $5.4
2023 $5.4
As of July 28, 2018 and April 28, 2018, the trade names, patents and technology licenses include $1.8 million of trade names that are not subject to amortization.
6.INCOME TAXESIncome Taxes
The provision for income taxes for an interim period is based on an estimated effective income tax rate for the full fiscal year and applies that rate to ordinary year-to-date earnings or loss. The estimated annual effective income tax rate is determined excluding the effects of unusual or significant discrete items that are reported net of the related tax effects and in the period in which they occur. In addition, any effects of enacted tax law or rate changes as well as the Company’s ability to utilize various tax assets is recognized in the period in which the change occurs.

  Three Months Ended
(Dollars in Millions) July 27,
2019		 July 28,
2018
Income before Income Taxes $35.6
 $28.2
Income Tax Expense $7.3
 $4.5
Effective Tax Rate 20.5% 16.0%


The Company recognized an income tax provision of $4.5 millionin the three months ended July 27, 2019 was slightly lower than the U.S. statutory tax rate primarily due to foreign investment tax credits and $4.3 million forforeign operations with lower statutory rates. The income tax provision in the three months ended July 28, 2018 and July 29, 2017, respectively. The Company’s effective tax rate was 16.0% and 17.1% for the three months ended July 28, 2018 and July 29, 2017, respectively. The income tax provision for the three month period ended July 28, 2018 is lower than the U.S. statutory tax rate primarily due to foreign investment tax credits, foreign operations with lower statutory rates and the deduction for stock compensation. 

The Company's unrecognized income tax provision for the three month period endedbenefits were $5.0 million and $3.1 million as of July 29, 2017 is lower than the U.S. statutory tax rate primarily due to foreign investment tax credits27, 2019 and foreign operations with lower statutory rates.

Additionally, the Company’s tax rate was impacted by U.S. Tax Reform, which was enacted on December 22, 2017. U.S. Tax Reform provided for a reductionApril 27, 2019, respectively. If any portion of the U.S. federal corporate incomeCompany's unrecognized tax rate from 35% to 21%,benefits is recognized, it could impact the Company's effective January 1, 2018.tax rate. The SEC staff issued Staff Accounting Bulletin ("SAB") 118 to provide certain guidancetax reserves are reviewed periodically and adjusted considering changing facts and circumstances, such as progress of tax audits, lapse of applicable statutes of limitations and changes in determining the accounting for income tax effects of the legislation in the accounting period of enactment as well as provide a one-year measurement period to finalize the effects associated with U.S. Tax Reform. In the three months ended July 28, 2018, there has not been a re-measurement associated with the transition tax provisions associated with U.S. Tax Reform. The Company will update andlaw.



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(Dollar amounts in millions, except per share data)


finalize the accounting for the tax effectsIncome Taxes Paid

The Company paid income taxes, net of the enactmentrefunds received, of U.S. Tax Reform$7.8 million and $9.3 million in future quarters as determined and in accordance with the guidance as outlined in SAB 118.

7.COMMON STOCK AND STOCK-BASED COMPENSATION
Restricted Stock Awards ("RSAs")
In fiscal 2016, the Compensation Committee of the Board of Directors authorized a new long-term incentive program (the “LTIP”) for key employees consisting of performance-based restricted stock awards (“RSAs”) and time-based restricted stock units (“RSUs”). Additionally, in the first quarter of fiscal 2019, the Compensation Committee awarded a maximum of 11,625 RSAs to additional key members of management under the LTIP.
In the aggregate, the number of RSAs earned will vary based on performance relative to established goals for fiscal 2020 EBITDA, with 50% of the target shares earned for threshold performance (representing 350,043 shares), 100% of the target shares earned for target performance (representing 700,086 shares) and 150% of the target shares earned for maximum performance (representing 1,050,128 shares). Prior to the third quarter of fiscal 2018, the Company had been recording the RSA compensation expense based on target performance.
Per ASC 718 accounting guidance, management is required in each reporting period to determine the fiscal 2020 EBITDA level that is "probable" (70% confidence) for which a performance condition will be achieved. During the third quarter of fiscal 2018, management determined that it was not probable that the Company will meet the fiscal 2020 target consolidated EBITDA performance level of $221.0 million. In the third quarter of fiscal 2018, the Company began recording the RSA compensation expense based on the threshold EBITDA performance level of $198.9 million.
At the threshold level of performance, the expected expense for the RSAs is $11.9 million through fiscal 2020. In the three months ended July 27, 2019 and July 28, 2018, respectively. 

6.     Balance Sheet Components

Inventories

Inventories are stated at the lower-of-cost or net realizable value. Cost is determined using the first-in, first-out method. Finished products and work-in-process inventories include direct material costs and direct and indirect manufacturing costs. The Company recorded compensationrecords reserves for inventory that may be obsolete or in excess of current and future market demand. A summary of inventories is shown below:
(Dollars in Millions) July 27,
2019		 April 27,
2019
Raw Materials $80.3
 $67.1
Work in Process 10.0
 9.4
Finished Products 31.7
 40.2
Total Inventories $122.0
 $116.7


Property, Plant and Equipment
Property, plant and equipment is stated at cost.  Maintenance and repair costs are expensed as incurred. Depreciation is calculated using the straight-line method using estimated useful lives of 5 to 40 years for buildings and building improvements and 3 to 15 years for machinery and equipment. A summary of property, plant and equipment is shown below:
(Dollars in Millions) July 27,
2019		 April 27,
2019
Land $3.7
 $3.7
Buildings and Building Improvements 82.9
 81.2
Machinery and Equipment 398.0
 390.7
Total Property, Plant and Equipment, Gross 484.6
 475.6
Less: Accumulated Depreciation 288.2
 283.7
Property, Plant and Equipment, Net $196.4
 $191.9

Depreciation expense of $1.0was $7.0 million related to the RSAs based on threshold levels. Duringand $6.5 million in the three months ended July 29, 2017, the Company recorded $1.5 million in compensation expense related to the RSAs, based on target levels.
In future reporting periods, if management makes a determination that exceeding the threshold level is probable for fiscal 2020, an appropriate adjustment to compensation expense will be recorded in that period. In addition, if management makes a determination that it is not probable the Company will meet the threshold level for fiscal 2020, a reversal of compensation expense will be recorded in that period. The adjustments could be material to the financial statements. Please see Note 13, "Subsequent Events," for more information.
Restricted Stock Units ("RSUs")
In the first quarter of fiscal27, 2019 the Compensation Committee awarded 7,750 RSUs to Methode management. In the aggregate, the Company has granted 646,675 RSUs to key employees, of which 346,897 are still outstanding. The RSUs are subject to a vesting period, with 30% vested on Apriland July 28, 2018, 30% vesting onrespectively. As of July 27, 2019 and April 27, 2019, capital expenditures recorded in accounts payable totaled $5.5 million and 40% vesting on May 2, 2020. The total expense for the RSUs is expected$6.4 million, respectively.

Pre-Production Tooling Costs Related to be $18.0 million through fiscal 2020. During the three months ended July 28, 2018, the Company recorded compensation expense of $0.1 million related to the RSUs. During the three months ended July 29, 2017, the Company recorded $1.5 million in compensation expense related to the RSUs.
Director Awards
During the first quarter of fiscal 2019, the Company issued 24,000 shares of common stock to our independent directors, all of which vested immediately upon grant. We recorded $0.9 million of compensation expense related to these shares during the three months ended July 28, 2018.

8.NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding for the applicable period.  Diluted net income per share is calculated after adjusting the denominator of the basic net income per share calculation for the effect of all potentially dilutive stock compensation awards outstanding during the period.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

Long-term Supply Arrangements
The following table sets forth the computation of basic and diluted net income per share:
  Three Months Ended
  July 28,
2018		 July 29,
2017
Numerator - Net Income $23.7
 $20.5
Denominator:    
Denominator for Basic Net Income per Share-Weighted Average Shares Outstanding and Vested/Unissued Restricted Stock Awards 37,350,444
 37,248,689
Dilutive Potential Common Shares-Employee Stock Options, Restricted Stock Awards and Restricted Stock Units 287,058
 312,551
Denominator for Diluted Net Income per Share 37,637,502
 37,561,240
     
Net Income per Share:    
Basic $0.63
 $0.55
Diluted $0.63
 $0.55
For the three months ended July 28, 2018, no options have been excluded in the computation of diluted net income per share because the average market price was greater than the exercise price for those periods. RSAs for 358,533 shares have been excluded in the computation of diluted net income per share for the three months ended July 28, 2018, as these awards are contingent on the Company's full-year performance in fiscal 2020.
For the three months ended July 29, 2017, no options have been excluded in the computation of diluted net income per share because the average market price was greater than the exercise price for those periods. RSAs for 821,075 shares have been excluded in the computation of diluted net income per share for the three months ended July 29, 2017, as these awards are contingent on the Company's full-year performance in fiscal 2020.
9.SEGMENT INFORMATION
     We are a global manufacturer of component and subsystem devices.  We design, manufacture and market devices employing electrical, electronic, wireless, sensing and optical technologies.  Our components are found in the primary end-markets of the automotive, appliance, communications (including information processing and storage, networking equipment and wireless and terrestrial voice/data systems), consumer and industrial equipment, aerospace, rail and other transportation industries.
 ASC No. 280, “Segment Reporting” establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources.  The CODM, as defined by ASC No. 280, is the Company’s President and Chief Executive Officer (“CEO”).
We have multiple operating segments that are aggregated into four reportable segments. Those segments are Automotive, Interface, Power Products and Other.
The Automotive segment supplies electronic and electro-mechanical devices and related products to automobile OEMs, either directly or through their tiered suppliers. Our products include integrated center consoles, hidden switches, ergonomic switches, transmission lead-frames, LED-based lighting and sensors, which incorporate magneto-elastic sensing and other technologies that monitor the operation or status of a component or system.
The Interface segment provides a variety of copper and fiber-optic interface and interface solutions for the aerospace, appliance, commercial food service, construction, consumer, material handling, medical, military, mining, point-of-sale and telecommunications markets.  Solutions include conductive polymers, industrial safety radio remote controls, optical and copper transceivers and solid-state field-effect consumer touch panels.  Services include the design and installation of fiber-optic and copper infrastructure systems and manufacturing active and passive optical components.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

The Power Products segment manufactures braided flexible cables, current-carrying laminated busbars and devices, custom power-product assemblies, such as our PowerRail® solution, high-current low-voltage flexible power cabling systems and powder-coated busbars that are used in various markets and applications, including aerospace, computers, industrial, power conversion, military, telecommunications and transportation.
The Other segment is primarily made up of our medical device business, Dabir Surfaces, our surface support technology aimed at pressure injury prevention. Methode is developing the technology for use by patients who are immobilized or otherwise at risk for pressure injuries, including patients undergoing long-duration surgical procedures.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies in our Form 10-K for the fiscal year ended April 28, 2018, with the exception of accounting policies for revenue, which can be found in Note 3, "Revenue," on this Form 10-Q.  We allocate resources to segments based on operating income. Transfers between segments are recorded using internal transfer prices set by us.
The tables below present information about our reportable segments.
  Three Months Ended July 28, 2018
  Automotive Interface 
Power
Products
 Other Eliminations/Corporate Consolidated
Net Sales $177.5
 $29.1
 $18.9
 $0.3
 $(2.4) $223.4
Transfers between Segments (2.2) (0.1) (0.1) —
 2.4
 —
Net Sales to Unaffiliated Customers $175.3
 $29.0
 $18.8
 $0.3
 $—
 $223.4
             
Income (Loss) from Operations $32.9
 $3.5
 $4.4
 $(2.1) $(10.0) $28.7
Interest Expense, Net           0.2
Other Expense, Net           0.3
Income before Income Taxes           $28.2
  Three Months Ended July 29, 2017
  Automotive Interface 
Power
Products
 Other Eliminations/Corporate Consolidated
Net Sales $158.9
 $29.5
 $15.2
 $0.1
 $(2.5) $201.2
Transfers between Segments (2.4) (0.1) —
 —
 2.5
 —
Net Sales to Unaffiliated Customers $156.5
 $29.4
 $15.2
 $0.1
 $—
 $201.2
             
Income (Loss) from Operations $35.8
 $0.4
 $3.3
 $(2.7) $(11.4) $25.4
Interest Income, Net           (0.2)
Other Expense, Net           0.8
Income before Income Taxes           $24.8
10.    CONTINGENCIES
Certain litigation arising in the normal course of business is pending against us.  We are, from time-to-time, subject to various legal actions and claims incidental to our business, including those arising out of alleged defects, breach of contracts, employment-related matters, environmental matters and intellectual property matters.  We consider insurance coverage and third-party indemnification when determining required accruals for pending litigation and claims.  Although the outcome of potential legal actions and claims cannot be determined, it is our opinion, based on the information available, that we have adequate reserves for these liabilities.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar amounts in millions, except per share data)

Hetronic Germany-GmbH Matters    
For several years, Hetronic Germany-GmbH and Hydronic-Steuersysteme-GmbH (the “Fuchs companies”) served as our distributors for Germany, Austria and other central and eastern European countries pursuant to their respective intellectual property licenses and distribution and assembly agreements. We became aware that the Fuchs companies and their managing director, Albert Fuchs, had materially violated those agreements. As a result, weterminated all of our agreements with the Fuchs companies. On June 20, 2014, we filed a lawsuit against the Fuchs companies in the Federal District Court for the Western District of Oklahoma alleging material breaches of the distribution and assembly agreements and seeking damages, as well as various forms of injunctive relief. The defendants have filed counterclaims alleging breach of contract, interference with business relations and business slander. On April 2, 2015, we amended our complaint against the Fuchs companies to add additional unfair competition and Lanham Act claims and to add additional affiliated parties. As of July 28, 2018, the matter remains in the pre-trial stage.
11.    PRE-PRODUCTION COSTS RELATED TO LONG-TERM SUPPLY ARRANGEMENTS
We incurCompany incurs pre-production tooling costs related to certain products produced for ourits customers under long-term supply agreements.  Wearrangements. As of July 27, 2019 and April 27, 2019, the Company had $23.4$36.5 million and $20.5$32.8 million, as of July 28, 2018 and April 28, 2018, respectively, of pre-production tooling costs related to customer-owned tools for which reimbursement is contractually guaranteed by the customer or for which the customer has provided a non-cancelable right to use the tooling.  Engineering, testing and other costs incurred in the design and development of production parts are expensed as incurred, unless the costs are reimbursable, as specified in a customer contract. WeAs of July 27, 2019 and April 27, 2019, the Company had $9.5$13.9 million and $10.1$15.0 million, at July 28, 2018 and April 28, 2018, respectively, of Company owned pre-production tooling, which is capitalized within property, plant and equipment.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

7.Goodwill and Intangible Assets
Goodwill
The following table shows goodwill by segment:
(Dollars in Millions) July 27,
2019		 April 27,
2019
Automotive $106.3
 $106.3
Industrial 126.7
 127.0
Total $233.0
 $233.3

Intangible Assets
The following tables present details of the Company's identifiable intangible assets:
 July 27, 2019
(Dollars in Millions)Gross 
Accumulated
Amortization
 Net 
Wtd. Avg. Remaining
Amortization
Periods (Years)
Definite-lived Intangible Assets:       
Customer Relationships and Agreements$244.6
 $30.9
 $213.7
 17.2
Trade Names, Patents and Technology Licenses75.6
 30.7
 44.9
 8.1
Total Definite-lived Intangible Assets320.2
 61.6
 258.6
  
Indefinite-lived Intangible Assets:       
Trade Names, Patents and Technology Licenses1.8
 —
 1.8
  
Total Indefinite-lived Intangible Assets1.8
 —
 1.8
  
Total Intangible Assets$322.0
 $61.6
 $260.4
  
 April 27, 2019
(Dollars in Millions)Gross 
Accumulated
Amortization
 Net 
Wtd. Avg. Remaining
Amortization
Periods (Years)
Definite-lived Intangible Assets:       
Customer Relationships and Agreements$244.5
 $27.7
 $216.8
 17.4
Trade Names, Patents and Technology Licenses75.5
 29.2
 46.3
 8.4
Total Definite-lived Intangible Assets320.0
 56.9
 263.1
  
Indefinite-lived Intangible Assets:       
Trade Names, Patents and Technology Licenses1.8
 —
 1.8
  
Total Indefinite-lived Intangible Assets1.8
 —
 1.8
  
Total Intangible Assets$321.8
 $56.9
 $264.9
  


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Based on the current amount of intangible assets subject to aamortization, the estimated aggregate amortization expense for each of the five succeeding fiscal years and thereafter is as follows:
(Dollars in Millions) 
Fiscal Year: 
Remainder of 2020$14.3
202119.0
202219.0
202319.0
202418.6
Thereafter168.7
Total$258.6


8.     Debt

The following table summarizes components of the Company's debt:
(Dollars in Millions) July 27,
2019		 April 27,
2019
Revolving Credit Facility $29.0
 $35.0
Term Loan 240.6
 243.7
Other Debt 16.2
 16.8
Unamortized Debt Issuance Costs (2.7) (2.9)
Total Debt 283.1
 292.6
Less: Current Maturities (15.4) (15.7)
Total Long-term Debt $267.7
 $276.9

Revolving Credit Facility/Term Loan

On September 12, 2018, the Company entered into five-year Amended and Restated Credit Agreement (“Credit Agreement”) with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank, National Association, as L/C Issuer, and the Lenders named therein (the “Credit Agreement”).N.A. The Credit Agreement has a maturity date ofamends and restates the credit agreement, dated November 18, 2021.2016, among the Company, Bank of America, N.A. and Wells Fargo Bank, N.A. The Credit Agreement consists of a senior unsecured revolving credit facility is in(“Revolving Credit Facility”) of $200.0 million and a senior unsecured term loan (“Term Loan”) of $250.0 million. In addition, the maximum principal amount of $150.0 million, withCompany has an option to increase the principal amountsize of the Revolving Credit Facility and Term Loan by up to an additional $100.0 million, subject to customary conditions and approval of the lender(s) providing new commitment(s). The credit facility is available for general corporate purposes, including working capital and acquisitions. The credit facility provides for variable rates of interest based on the type of borrowing and the Company's debt to EBITDA financial ratio.$200.0 million. The Credit Agreement is guaranteed by the Company’s wholly-owned U.S. subsidiaries. For the Term Loan, the Company is required to make quarterly principal payments of 1.25% of the original Term Loan ($3.1 million) through maturity, with the remaining balance due on September 12, 2023.
Outstanding borrowings under the Credit Agreement bear interest at variable rates based on the type of borrowing and the Company’s debt to EBITDA financial ratio, as defined. The interest rate on outstanding borrowings under the Credit Agreement was 3.76% at July 27, 2019. The Credit Agreement contains customary representations and warranties, financial covenants, restrictive covenants and events of default. At July 28, 2018, the interest rate on the credit facility was 1.25% plus LIBOR and we were in compliance with the covenants of the agreement. During the three months ended July 28, 2018, we had no borrowings and payments of $2.3 million, which includes interest of $0.3 million, under this credit facility. As of July 28, 2018, there were outstanding balances against27, 2019, the credit facility of $28.0 million. We believe the fair value approximates the carrying amount as of July 28, 2018. Please see Note 13, "Subsequent Events," for more information.
Methode's subsidiary, Pacific Insight, is party to two separate credit agreements, one with the Bank of Montreal and one with Roynat. The credit agreement with the Bank of Montreal has a maturity date of December 21, 2019 and provides a credit facility in the maximum principal amount of C$10.0 million, with an option to increase the principal amount by up to an additional C$5.0 million. Availability under the facility is determined based upon a percentage of eligible accounts receivable and finished goods inventory balances and funds are available in either Canadian or U.S. currency. Interest is calculated at either the Canadian Dollar Offered Rate plus 1.25%, the Federal Funds Rate plus 1.25% or LIBOR plus 1.75%. As of July 28, 2018, there were no outstanding balances against this credit facility and Pacific InsightCompany was in compliance with all the covenants in the Credit Agreement.

Other Debt

The Company’s subsidiary, Procoplast, has debt that consists of seventeen notes with maturities ranging from 2019 to 2031. The weighted-average interest rate was approximately 1.5% at July 27, 2019 and $2.8 million of the agreement.debt was classified as short-term.
The credit agreement between Pacific Insight and Roynat has a maturity date of May 24, 2020 and provides a credit facility in the maximum principal amount of $10.0 million, with an option to increase the principal amount by up to an additional $3.5 million. The interest rate on the credit facility is 2.25% plus LIBOR. During the three months ended July 28, 2018, we have had no borrowings and repayments of $0.9 million under this credit facility. As of July 28, 2018, there were outstanding balances against the credit facility of $2.7 million, of which $0.7 million is due within the next twelve months, and Pacific Insight was in compliance with the covenants of the agreement. We believe the fair value approximates the carrying amount as of July 28, 2018.
Excluding credit facilities, the Company also holds debt at its Procoplast subsidiary. As of July 28, 2018, Procoplast holds short-term debt totaling $3.3 million, with a weighted average interest rate of 1.68%. As of July 28, 2018, Procoplast


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(Dollar amounts
Interest Paid
The Company paid interest of $2.9 million and $0.4 million in millions, exceptthe three months ended July 27, 2019 and July 28, 2018, respectively.

9.Stock-based Compensation
The Company has granted stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and stock awards to employees and non-employee directors under the Methode Electronics, Inc. 2014 Incentive Plan (“2014 Plan”), the Methode Electronics, Inc. 2010 Stock Plan (“2010 Plan”) and the Methode Electronics, Inc. 2007 Stock Plan (“2007 Plan”). The Company’s stockholders approved the 2014 Plan in September 2014. The Company can no longer make grants under the 2010 Plan or 2007 Plan. The number of shares of common stock that may be issued under the 2014 Plan is 3,000,000, less one share for every one share of common stock issued or issuable pursuant to awards made after May 3, 2014 under the 2007 Plan or 2010 Plan.
Restricted Stock Awards
The RSAs granted under the 2014 Plan are performance-based awards that are scheduled to vest at the end of fiscal 2020 based on the achievement of an EBITDA hurdle. The number of shares ultimately earned could range from 0% to 150% of the target award based on the achievement of the EBITDA performance condition. The fair value of the RSAs granted was based on the closing stock price on the date of grant. All non-vested RSAs accrue dividend equivalents, which are subject to vesting and paid in cash upon release. Accrued dividends are forfeitable to the extent that the underlying awards do not vest.

Per ASC 718, "Compensation - Stock Compensation," compensation expense is recognized for these awards over the vesting period based on the projected probability (70% confidence) of achievement of the EBITDA hurdle in fiscal 2020. In each period, the stock-based compensation expense may be adjusted, as necessary, in response to any changes in the Company’s forecast with respect to achieving the fiscal 2020 EBITDA hurdle. In the three months ended July 28, 2018, the Company recognized stock-based compensation expense for these awards at the threshold level. The Company is currently recognizing stock-based compensation at target.

The following table summarizes the RSA activity under the 2014 Plan in the three months ended July 27, 2019:
 RSA Shares Wtd. Avg. Grant Date Fair Value
Non-vested and Unissued at April 27, 20191,031,408
 $34.09
Awarded—
 $—
Vested(11,250) $33.78
Forfeited(5,670) $33.78
Non-vested and Unissued at July 27, 20191,014,488
 $34.10


The shares vested and forfeited in the three months ended July 27, 2019 relate to a deceased employee. Under the terms of the RSA award agreements, awards vest immediately at the target level upon the death of an employee.

Restricted Stock Units
RSUs granted under the 2014 Plan vest over a pre-determined period of time, generally between three to five years from the date of grant. The fair value of the RSUs are based on the closing stock price on the date of grant.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The following table summarizes the RSU activity under the 2014 Plan in the three months ended July 27, 2019:
  RSU Shares Wtd. Avg. Grant Date Fair Value
Non-vested at April 27, 2019 187,844
 $34.55
Awarded —
 $—
Vested (4,500) $33.78
Forfeited —
 $—
Non-vested at July 27, 2019 183,344
 $34.57

The shares vested in the three months ended July 27, 2019 relate to a deceased employee. Under the terms of the RSU award agreements, awards vest immediately upon the death of an employee.

Director Awards
In the three months ended July 27, 2019 and July 28, 2018, the Company granted 30,000 shares and 24,000 shares, respectively, of common stock to its non-employee directors under the 2014 Plan. The shares vested immediately upon grant. The fair value was determined based on the closing price of the Company’s stock on the date of grant.

Stock Options

As of July 27, 2019, the Company has 72,000 stock options outstanding and exercisable under the 2010 Plan at a weighted average exercise price of $37.01 per share data)and 34,668 stock options outstanding and exercisable under the 2007 Plan at a weighted average exercise price of $33.20 per share. There were no awards, exercises or forfeitures of stock options in the three months ended July 27, 2019.

Stock-based Compensation Expense
All stock-based awards to employees and non-employee directors are recognized in selling and administrative expenses on the condensed consolidated statements of income.

The table below summarizes the stock-based compensation expense related to the equity awards:
  Three Months Ended
(Dollars in Millions) July 27, 2019 July 28, 2018
RSAs $1.2
 $1.1
RSUs 0.4
 0.1
Director Awards 0.9
 0.9
Total Stock-based Compensation Expense $2.5
 $2.1


10.Income per Share
Basic income per share is calculated by dividing net income by the weighted average number of common shares outstanding for the applicable period.  Diluted income per share is calculated after adjusting the denominator of the basic income per share calculation for the effect of all potentially dilutive common shares outstanding during the period.

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holds long-term debtThe following table sets forth the computation of basic and diluted income per share:
  Three Months Ended
  July 27,
2019		 July 28,
2018
Numerator:    
Net Income (in millions) $28.3
 $23.7
Denominator:    
Denominator for Basic Income per Share-Weighted Average Shares Outstanding and Vested/Unissued Restricted Stock Units 37,534,451
 37,350,444
Dilutive Potential Common Shares-Employee Stock Options, Restricted Stock Awards and Restricted Stock Units 132,603
 287,058
Denominator for Diluted Income per Share 37,667,054
 37,637,502
     
Basic and Diluted Income per Share:    
Basic Income per Share $0.75
 $0.63
Diluted Income per Share $0.75
 $0.63

In the three months ended July 27, 2019, options and RSUs of 109,418 were excluded from the computation of diluted net income per share as their effect would have been anti-dilutive. All RSAs have been excluded in the computation of diluted net income per share in the three months ended July 27, 2019 as these awards contain performance conditions that consistswould not have been achieved as of eighteen notes totaling $19.2 million, withthe three months ended July 27, 2019.
In the three months ended July 28, 2018, the Company had no options or RSUs that were excluded from the computation of diluted net income per shares. All RSAs have been excluded in the computation of diluted net income per share in the three months ended July 28, 2018, as these awards contain performance conditions that would not have been achieved as of the three months ended July 28, 2018.
11.Segment Information
     An operating segment is defined as a weighted-average interest ratecomponent of 1.45%an enterprise that engages in business activities from which it may earn revenues and maturities ranging from 2019incur expenses, and about which separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to 2031.allocate resources.  The CODM is the Company’s President and Chief Executive Officer (“CEO”).
Effective October 27, 2018, the Company reorganized its reportable segments upon the acquisition of Grakon. Prior to the acquisition, the Company's reportable segments were Automotive, Power, Interface and Other. As a result of this change, the Company's reportable segments are now Automotive, Industrial, Interface and Medical. Historical information has been revised to reflect the new reportable segments.
A summary of the significant reportable segment changes is as follows:
Grakon's automotive business has been included in the Automotive segment, while Grakon's non-automotive business has been included in the Industrial segment.
The busbar business, previously included in the Power segment, is now part of the Industrial segment.
The radio-remote control business, previously included in the Interface segment, is now part of the Industrial segment.
The medical devices business, previously included in the Other segment, now makes up the Medical segment.

The Automotive segment supplies electronic and electro-mechanical devices and related products to automobile OEMs, either directly or through their tiered suppliers. Products include integrated center consoles, hidden switches, ergonomic switches, transmission lead-frames, LED-based lighting and sensors, which incorporate magneto-elastic sensing and other technologies that monitor the operation or status of a component or system.
The Industrial segment manufactures external lighting solutions, industrial safety radio remote controls, braided flexible cables, current-carrying laminated busbars and devices, custom power-product assemblies, such as our PowerRail®

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

solution, high-current low-voltage flexible power cabling systems and powder-coated busbars that are used in various markets and applications, including aerospace, computers, industrial, power conversion, military, telecommunications and transportation.
The Interface segment provides a variety of copper and fiber-optic interface and interface solutions for the appliance, commercial food service, construction, consumer, material handling, point-of-sale and telecommunications markets.  Solutions include copper transceivers and solid-state field-effect consumer touch panels.

The Medical segment is made up of the Company's medical device business, Dabir Surfaces, its surface support technology aimed at pressure injury prevention. Methode has developed the technology for use by patients who are immobilized or otherwise at risk for pressure injuries, including patients undergoing long-duration surgical procedures.

The tables below present information about the Company's reportable segments.
  Three Months Ended July 27, 2019
(Dollars in Millions) Automotive Industrial Interface Medical Eliminations/Corporate Consolidated
Net Sales $187.5
 $71.6
 $12.9
 $0.3
 $(2.1) $270.2
Transfers between Segments (1.3) (0.8) —
 —
 2.1
 —
Net Sales to Unaffiliated Customers $186.2
 $70.8
 $12.9
 $0.3
 $—
 $270.2
             
Income (Loss) from Operations $33.1
 $16.5
 $0.2
 $(1.5) $(9.7) $38.6
Interest Expense, Net           2.9
Other Expense, Net           0.1
Income before Income Taxes           $35.6
  Three Months Ended July 28, 2018
(Dollars in Millions) Automotive Industrial Interface Medical Eliminations/Corporate Consolidated
Net Sales $177.5
 $33.0
 $15.7
 $0.3
 $(3.1) $223.4
Transfers between Segments (2.2) (0.8) (0.1) —
 3.1
 —
Net Sales to Unaffiliated Customers $175.3
 $32.2
 $15.6
 $0.3
 $—
 $223.4
             
Income (Loss) from Operations $32.9
 $7.1
 $0.8
 $(2.1) $(10.0) $28.7
Interest Expense, Net           0.2
Other Expense, Net           0.3
Income before Income Taxes           $28.2

12.    SUBSEQUENT EVENTSContingencies
ExecutionCertain litigation arising in the normal course of Merger Agreementbusiness is pending against us.  The Company is, from time-to-time, subject to various legal actions and claims incidental to our business, including those arising out of alleged defects, breach of contracts, employment-related matters, environmental matters and intellectual property matters.  The Company considers insurance coverage and third-party indemnification when determining required accruals for pending litigation and claims.  Although the outcome of potential legal actions and claims cannot be determined, it is the Company's opinion, based on the information available, that it has adequate reserves for these liabilities.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Hetronic Germany-GmbH Matters    
For several years, Hetronic Germany-GmbH and Hydronic-Steuersysteme-GmbH (the “Fuchs companies”) served as the Company's distributors for Germany, Austria and other central and eastern European countries pursuant to their respective intellectual property licenses and distribution and assembly agreements. The Company became aware that the Fuchs companies and their managing director, Albert Fuchs, had materially violated those agreements. As a result, the Companyterminated all of its agreements with the Fuchs companies. On AugustJune 20, 2018, Methode entered into an agreement to purchase 100%2014, the Company filed a lawsuit against the Fuchs companies in the Federal District Court for the Western District of Oklahoma alleging material breaches of the stockdistribution and assembly agreements and seeking damages, as well as various forms of Grakon Parent, Inc. (“Grakon”) for approximately $420 million in cash, on a cash-free, debt-free basis, subject to customary post-closing adjustments. Methode intends to utilize approximately $140 millioninjunctive relief. The defendants have filed counterclaims alleging breach of cash on handcontract, interference with business relations and has entered into a debt commitment agreement with certain lenders, pursuant to which the lenders have committed to make available to Methode at closing a $250 million term loan facility and a $200 million revolving credit facility, which will replace Methode’s existing revolving credit facility. The transaction is not subject to a financing condition. Grakon is a global leader in the design, development and manufacture of advanced lighting systems, controls and components for premier OEM manufacturers in the heavy truck, bus, rail, electric vehicle and power sports markets. The acquisition is subject to customary closing conditions, including expiration of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is expected to be completed in September 2018.

Execution of Commitment Letter

In connection with the agreement to purchase Grakon,business slander. On April 2, 2015, the Company entered into a debt commitment letter, dated as of August 20, 2018 (the “Commitment Letter”), with Bank of America, N.A. (“BAML”)amended its complaint against the Fuchs companies to add additional unfair competition and Wells Fargo Bank, National Association (“Wells Fargo,”Lanham Act claims and together with BAML, the “Commitment Parties”), pursuant to which, among other things, the Commitment Parties have committed to provide, subject to the terms and conditions of the Commitment Letter, a $250 million senior unsecured term loan credit facility and a $200 million senior unsecured revolving credit facility, the proceeds of which may be used to finance the acquisition andadd additional affiliated parties. The matter has been set for working capital, capital expenditures, and other lawful corporate purposes. The interest rate on the credit facility and term loan is LIBOR + applicable margin of between 1.25% to 2% depending on consolidated leverage levels. This new credit agreement will replace Methode’s existing revolving credit facility.trial in February 2020.

Stock-based Compensation

Per ASC 718 accounting guidance, management is required in each reporting period to determine the fiscal 2020 EBITDA level that is "probable" (70% confidence level) for which a performance condition will be achieved in order to determine the appropriate compensation expense for the RSAs. Prior to the announced acquisition of Grakon, the Company was recording the RSA compensation expense based on threshold performance. Due to the expected accretive results and positive EBITDA for Grakon in fiscal 2020, the Company will re-evaluate the "probable" performance level of the LTIP program upon closing of the acquisition, which could result in a change in the expected performance level. If management makes a determination that exceeding the threshold level is probable for fiscal 2020, an increase to compensation expense will be recorded in that period.


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement
Certain statements in this report are forward-looking statements that are subject to certain risks and uncertainties.  We undertake no duty to update any such forward-looking statements to conform to actual results or changes in our expectations.  Our business is highly dependent upon two large automotive customers and specific makes and models of vehicles.  Our results will be subject to many of the same risks that apply to the automotive, appliance, commercial vehicle, computer and communications industries, such as general economic conditions, interest rate fluctuations, consumer spending patterns and technological changes.  Other factors which may result in materially different results for future periods include the following risk factors. Additional risks and uncertainties not presently known or that our management currently believe to be insignificant may also adversely affect our financial condition or results of operations.  These risk factors should be considered in connection with evaluating the forward-looking statements contained in this report because these factors could cause our actual results and condition to differ materially from those projected in forward-looking statements.  The forward-looking statements in this report are subject to the safe harbor protection provided under the securities laws and are made as of the date of this report. Among the factors that could cause actual results to differ materially from past results and future plans and projected future results are the following:
Our business is highly dependent on two large automotive customers.  If we were to lose either of these customers or experienced a significant decline in the volume or price of products purchased by these customers, or if either of the customers declared bankruptcy, our future results could be adversely affected.
Because we derive a substantial portion of our revenues from customers in the automotive, commercial vehicle, appliance, computer and communications industries, we are susceptible to trends and factors affecting those industries.
OurInternational trade disputes could result in tariffs, 'trade wars,' and other protectionist measures that could adversely affect the Company’s business, including its ability to marketmitigate tariff costs.
Our inability, or our automotive products is subject to a lengthy sales cycle, which requires significant investment prior to significant sales revenues, and there is no assurance that our products will be implemented in any particular vehicle.
Ourcustomers' inability, to effectively manage the timing, volume, quality and cost of new program launches could adversely affect our financial performance.
We cannot guarantee that the acquisition of Grakon will be consummated within the expected time period, or at all, and if consummated, that the Company's assumptions regarding the acquisition will be correct.
We are subject to continuing pressure to lower our prices.
Our Dabir Surfaces medical device products are emerging technologies. Our ability to successfully market and sell these products will depend on acceptance by the medical community.
A significant fluctuation between the U.S. dollar and other currencies could adversely impact our operating results.results of operations and financial condition.
A significant portion of our business activities are conducted in foreign countries, exposing us to additional risks that may not exist in the United States.
Any changes in U.S. trade policy could trigger retaliatory actions by affected countries, resulting in ‘trade wars.’
Our Dabir Surface medical device products are emerging technologies. Our ability to successfully market and sell these products, and the timing of such sales, will depend on acceptance by the medical community and other potential customers.
Disruption of our supply chain could have an adverse effect on our business, financial condition and results of operations.
Changes in our effective tax rate may harm our results of operations.
We are dependent on the availability and price of materials.
Our gross margins are subject to fluctuations due to many factors such as geographical and vertical market pricing mix, pricing reductions and various manufacturing cost variables.
Should a catastrophic event or other significant business interruption occur at any of our facilities, we could face significant reconstruction or remediation costs, penalties, third party liability and loss of production capacity, which could adversely affect our business.
Impairment charges relating to our goodwill and long-lived assets could adversely affect our financial statements.

Our inability to capitalize on prior or future acquisitions or any decision to strategically divest one or more current businesses may adversely affect our business.
Our ability to market our automotive and commercial vehicle products is subject to a lengthy sales cycle, which requires significant investment prior to significant sales revenues, and there is no assurance that our products will be implemented in any particular vehicle.
We are dependent on the availability and price of materials.
Our gross profit margins are subject to fluctuations due to many factors.
Disruption of our supply chain could have an adverse effect on our business, financial condition and results of operations.
Changes in our effective tax rate may harm our results of operations.
We may be unable to keep pace with rapid technological changes, which could adversely affect our business.

Our information technology (“IT”) systems could be breached.
Products we manufacture may contain design or manufacturing defects that could result in reduced demand for our products or services costs associated with recalls, orand liability claims against us.
Our technology-based businessbusinesses and the markets in which we operate are highly competitive.  If we are unable to compete effectively, our sales could decline.
If we are unable to protect our intellectual property or we infringe, or are alleged to infringe, on another person’s intellectual property, our business, financial condition and operating results could be materially adversely affected.
Any decision to strategically divest one or more current businesses or our inability to capitalize on prior or future acquisitions may adversely affect our business.
We may be required to recognize additional impairment charges on assets, such as goodwill, intangible assets and property, plant and equipment, which could be material to our financial statements.
We cannot guarantee that the Pacific Insight and Procoplast businessesrecently acquired Grakon business will be successful or that we can implement and profit from any new applications of the acquired technology.
Our long-term incentive plan could require significant adjustments to compensation expense in our condensed consolidated statements of operationsincome if management changes its determinations on the probability of meeting certain performance levels. The adjustments could be material to the financial statements.
We have incurred a significant amount of indebtedness, and our level of indebtedness and restrictions under our indebtedness could adversely affect our operations and liquidity.
Regulations related to the use of conflict-free minerals may increase our costs and expenses, and an inability to certify that our products are conflict-free may adversely affect customer relationships.
Any such forward-looking statements are not guarantees of future performance and actual results, developments and business decisions may differ materially from those foreseen in such forward-looking statements.  These forward-looking statements speak only as of the date of the report, press release, statement, document, webcast or oral discussion in which they are made.  We do not intend to update any forward-looking statements, all of which are expressly qualified by the foregoing.  See Part I — Item 1A, Risk Factors of our Form 10-K for the fiscal year ended April 28, 2018 and Part II — Item 1A, Risk Factors of this Form 10-Q27, 2019 for further discussions regarding some of the reasons that actual results may be materially different from those we anticipate.
Overview
We are a global manufacturer of component and subsystem devices with manufacturing, design and testing facilities in Belgium, Canada, China, Egypt, Germany, India, Italy, Lebanon, Malta, Mexico, the Netherlands, Singapore, Switzerland, the United Kingdom and the United States. Our primary manufacturing facilities are located in Dongguan and Shanghai, China; Cairo, Egypt; Mriehel, Malta; and Fresnillo and Monterrey, and Fresnilla, Mexico; and Nelson, British Columbia, Canada.Mexico. We design, manufacture and market devices employing electrical, radio remote control, electronic, LED lighting, wireless and sensing and optical technologies. Our business is managed on a segment basis, with those

Effective October 27, 2018, we reorganized our reportable segments beingresulting from the acquisition of Grakon. Prior to the Grakon acquisition, our reportable segments were Automotive, Interface, Power, ProductsInterface and Other. For moreAs a result of this change, our reportable segments are now Automotive, Industrial, Interface and Medical. Historical information regardinghas been revised to reflect the business and products of these segments, see “Item 1. Business.” of our Form 10-K for the fiscal year ended April 28, 2018, and the descriptions below regarding the business and products of our Procoplast and Pacific Insight subsidiaries, which were acquired in fiscal 2018.new reportable segments.

Our components are found in the primary end-markets of the aerospace, appliance, automotive, commercial vehicle, construction, consumer and industrial equipment, communications (including information processing and storage, networking equipment and wireless and terrestrial voice/data systems), medical, rail and other transportation industries.
Recent EventsTransactions


On August 20,September 12, 2018, Methode entered into an agreement to purchasewe acquired 100% of the stock of Grakon Parent, Inc. (“Grakon”) for approximately $420$422.1 million in cash, on a cash-free, debt-free basis, subject to customary post-closing adjustments. Methode intends to utilize approximately $140 millionnet of cash on hand and has entered into a debt commitment agreement with certain lenders, pursuant to which the lenders have committed to make available to Methode at closing a $250 million term loan facility and a $200 million revolving credit facility, which will replace Methode’s existing revolving credit facility.acquired. The transaction is not subject to a financing condition. Grakonbusiness, headquartered in Seattle, Washington, is a global leadermanufacturer of custom designed exterior lighting solutions and highly styled engineered components, with locations in Canada, China, the design, developmentNetherlands and manufacturethe United Kingdom. Grakon’s manufacturing capabilities and products help diversify our product offerings and expand the Industrial segment, which is a key component of advanced lighting systems, controls and components for premier OEM manufacturers in the heavy truck, bus, rail, electric vehicle and power sports markets. The acquisition is subject to customary closing conditions, including expirationour strategic direction.

of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is expected to be completed in September 2018.


In connection with the agreement to purchase Grakon, on August 20,September 12, 2018, the Company entered into the Commitment Letter with the Commitment Parties, pursuant to which, among other things, the Commitment Parties have committed to provide, subject to the terms and conditionswe amended our credit agreement. The credit agreement now has a maturity date of the Commitment Letter,September 12, 2023. The credit agreement includes a $250 million senior unsecured term loan credit facility and a $200 million senior unsecured revolving credit facility the proceeds of which may be used to finance the acquisition and for working capital, capital expenditures, and other lawful corporate purposes. The interest rate on the credit facility anda senior unsecured term loan, which are guaranteed by our wholly owned U.S. subsidiaries. See “Financial Condition, Liquidity and Capital Resources” below for more information.

Results of Operations
Three Months Ended July 27, 2019 vs. Three Months Ended July 28, 2018
Consolidated Results
Below is LIBOR + applicable margina table summarizing results for the three months ended:
(Dollars in Millions) July 27,
2019		 July 28,
2018		 Net Change ($) Net Change (%)
Net Sales $270.2
 $223.4
 $46.8
 20.9 %
         
Cost of Products Sold 194.4
 163.3
 31.1
 19.0 %
         
Gross Profit 75.8
 60.1
 15.7
 26.1 %
         
Selling and Administrative Expenses 32.4
 29.5
 2.9
 9.8 %
Amortization of Intangibles 4.8
 1.9
 2.9
 152.6 %
Interest Expense, Net 2.9
 0.2
 2.7
 1,350.0 %
Other Expense, Net 0.1
 0.3
 (0.2) (66.7)%
Income Tax Expense 7.3
 4.5
 2.8
 62.2 %
Net Income $28.3
 $23.7
 $4.6
 19.4 %
         
Percent of sales: July 27,
2019		 July 28,
2018		    
Net Sales 100.0% 100.0%    
Cost of Products Sold 71.9% 73.1%    
Gross Profit 28.1% 26.9%    
Selling and Administrative Expenses 12.0% 13.2%    
Amortization of Intangibles 1.8% 0.9%    
Interest Expense, Net 1.1% 0.1%    
Other Expense, Net —% 0.1%    
Income Tax Expense 2.7% 2.0%    
Net Income 10.5% 10.6%    
Net Sales.  Consolidated net sales increased $46.8 million, or 20.9%, to $270.2 million in the three months ended July 27, 2019, compared to $223.4 million in the three months ended July 28, 2018.  The acquisition of between 1.25% to 2% depending on consolidated leverage levels. This new credit agreement will replace Methode’s existing revolving credit facility.Grakon accounted for

In the first quarter of fiscal 2018, we acquired 100%$54.3 million of the stockincrease, while the impact of Procoplastforeign currency translation decreased net sales by $4.3 million. The weaker euro and Chinese renminbi impacted foreign currency translation. Excluding Grakon and foreign currency translation, net sales decreased by $3.2 million, primarily due to lower radio remote control product sales volumes in the Industrial segment and lower appliance and data solution product sales volumes in the Interface segment.
Cost of Products Sold.  Consolidated cost of products sold increased $31.1 million, or 19.0%, to $194.4 million (71.9% of sales) in the three months ended July 27, 2019, compared to $163.3 million (73.1% of sales) in the three months ended July 28, 2018.  The acquisition of Grakon accounted for $22.2$34.7 million of the increase, while the impact of foreign currency translation decreased cost of products sold by $2.7 million. Foreign currency translation was also negatively impacted from the stronger Mexican peso. Excluding Grakon and foreign currency translation, cost of products sold decreased by $0.9 million primarily due to the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019, lower radio remote control product sales volumes in the Industrial segment and lower appliance and data solution product sales volumes in the Interface segment.

Gross Profit. Gross profit increased $15.7 million, or 26.1%, to $75.8 million (28.1% of sales) in the three months ended July 27, 2019, compared to $60.1 million (26.9% of sales) in the three months ended July 28, 2018. The acquisition of Grakon accounted for $19.6 million of the increase (inclusive of net tariff expense of $0.3 million), while foreign currency translation decreased gross profit by $1.6 million. Excluding Grakon and foreign currency translation, gross profit decreased by $2.3 million, primarily due to lower radio remote control product sales volumes in the Industrial segment and lower appliance and data solution product sales volumes in the Interface segment, partially offset by the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019.
Selling and Administrative Expenses.  Selling and administrative expenses increased $2.9 million, or 9.8%, to $32.4 million (12.0% of sales) in the three months ended July 27, 2019, compared to $29.5 million (13.2% of sales) in the three months ended July 28, 2018.  The acquisition of Grakon accounted for $4.8 million of the increase, while the impact of foreign currency translation decreased selling and administrative expenses by $0.4 million. In addition, the three months ended July 28, 2018 included $0.7 million of costs related to initiatives to reduce overall costs and improve operational profitability. Excluding Grakon, foreign currency translation and costs related to initiatives to reduce overall costs and improve operational profitability, selling and administrative expenses decreased by $0.8 million. The decrease was primarily due to the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019 and lower acquisition-related costs of $0.6 million, partially offset by a $0.4 million increase in stock-based compensation expense.
Amortization of Intangibles.  Amortization of intangibles increased $2.9 million, or 152.6%, to $4.8 million in cash, net of cash acquired. The business, located near the Belgian-German border, is an independent manufacturer of automotive assemblies. The accounts and transactions of Procoplast have been includedthree months ended July 27, 2019, compared to $1.9 million in the Automotive segmentthree months ended July 28, 2018. The increase was due to amortization expense related to the Grakon acquisition, partially offset by lower amortization expense in the consolidated financial statements fromInterface segment.
Interest Expense, Net.  Interest expense, net was $2.9 million in the effective date ofthree months ended July 27, 2019, compared to $0.2 million in the acquisition.

Inthree months ended July 28, 2018. The increase was due to borrowings made in the second quarter of fiscal 2018, Methode acquired 100%2019 to fund the acquisition of Grakon.
Other Expense, Net. Other expense, net decreased $0.2 million to $0.1 million in the three months ended July 27, 2019, compared to $0.3 million in the three months ended July 28, 2018. Net foreign exchange losses were $0.2 million in the three months ended July 27, 2019, compared to a foreign exchange gain of $0.2 million in the three months ended July 28, 2018.
Income Tax Expense.  Income tax expense increased $2.8 million, or 62.2%, to $7.3 million in the three months ended July 27, 2019, compared to $4.5 million in the three months ended July 28, 2018.  Our effective tax rate increased to 20.5% in the three months ended July 27, 2019, compared to 16.0% in the three months ended July 28, 2018. The change in the effective tax rate was primarily due to discrete tax items recorded during the period and the level and mix of earnings among tax jurisdictions.
Net Income.  Net income increased $4.6 million, or 19.4%, to $28.3 million in the three months ended July 27, 2019, compared to $23.7 million in the three months ended July 28, 2018. The acquisition of Grakon accounted for $8.9 million of the outstanding common sharesincrease, while the impact of Pacific Insightforeign currency translation decreased net income by $1.0 million. Excluding Grakon and foreign currency translation, net income decreased by $3.3 million primarily due to lower gross profit, higher interest expense and higher tax expense, partially offset by the benefits of initiatives to reduce overall costs and improve operational profitability taken in a cash transaction for $107.7 million, net of cash acquired.  Pacific Insight, headquartered in Vancouver, British Columbia, Canada,fiscal 2019.

Operating Segments
Automotive Segment Results
Below is a global solutions provider offering design, development, manufacturing and deliverytable summarizing results for the three months ended:
(Dollars in Millions) July 27,
2019		 July 28,
2018		 Net Change ($) Net Change (%)
Net Sales $186.2
 $175.3
 $10.9
 6.2%
Gross Profit $47.4
 $47.0
 $0.4
 0.9%
Income from Operations $33.1
 $32.9
 $0.2
 0.6%
         
Percent of sales: July 27,
2019		 July 28,
2018		    
Net Sales 100.0% 100.0%    
Gross Profit 25.5% 26.8%    
Income from Operations 17.8% 18.8%    
Net Sales.  Automotive segment net sales increased $10.9 million, or 6.2%, to $186.2 million in the three months ended July 27, 2019, compared to $175.3 million in the three months ended July 28, 2018.  Net sales in North America increased $17.8 million, or 17.1%, to $121.6 million in the three months ended July 27, 2019, compared to $103.8 million in the three months ended July 28, 2018. North American sales included $13.8 million from Grakon, which was acquired in the second quarter of lighting and electronicfiscal 2019. Other North American sales increased from our human machine interface assembly products due to recent program launches. Sales also increased from our integrated center stack products primarily due to higher sales volumes, partially offset by pricing reductions. Sales from our transmission lead-frame assemblies decreased due to lower sales volumes. Net sales in Europe decreased $2.5 million, or 4.9%, to $49.0 million in the three months ended July 27, 2019, compared to $51.5 million in the three months ended July 28, 2018. The impact of the weaker euro decreased net sales in Europe by $2.2 million. The decrease in European sales was also due to lower sales volumes of hidden switches, partially offset by higher sales volumes of sensor products. Net sales in Asia decreased $4.4 million, or 22.0%, to $15.6 million in the three months ended July 27, 2019, compared to $20.0 million in the three months ended July 28, 2018, primarily due to lower sales volumes of our sensor products and full-service solutionsa combination of pricing reductions and lower sales volumes of our transmission lead-frame assemblies. The weaker Chinese renminbi decreased net sales in Asia by $0.9 million.
Gross Profit. Automotive segment gross profit increased $0.4 million, or 0.9%, to $47.4 million in the three months ended July 27, 2019, compared to $47.0 million in the three months ended July 28, 2018.  The Automotive segment gross profit margin decreased to 25.5% in the three months ended July 27, 2019, compared to 26.8% in the three months ended July 28, 2018.  Gross profit margin decreased primarily due to decreases in sales volumes in both Asia and Europe, which generally operate at higher gross profit margins than our North American businesses. The gross profit margin was also impacted from pricing reductions on certain products, the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019 and the strengthening of the Mexican peso as compared to the automotiveU.S. dollar during the period.
Income from Operations. Automotive segment income from operations increased $0.2 million, or 0.6%, to $33.1 million in the three months ended July 27, 2019, compared to $32.9 million in the three months ended July 28, 2018. The increase was primarily due to the acquisition of Grakon and commercial vehicle markets. Its technologythe benefits of initiatives to reduce overall costs and improve operational profitability taken in LED-based ambientfiscal 2019, offset by the impact of foreign currency translation due to the strengthening U.S. dollar compared to the euro and direct lighting will expandChinese renminbi during the period.

Industrial Segment Results
Below is a table summarizing results in the three months ended:
(Dollars in Millions) July 27,
2019		 July 28,
2018		 Net Change ($) Net Change (%)
Net Sales $70.8
 $32.2
 $38.6
 119.9%
Gross Profit $26.5
 $10.4
 $16.1
 154.8%
Income from Operations $16.5
 $7.1
 $9.4
 132.4%
         
Percent of sales: July 27,
2019		 July 28,
2018		    
Net Sales 100.0% 100.0%    
Gross Profit 37.4% 32.3%    
Income from Operations 23.3% 22.0%    
Net Sales.  Industrial segment net sales increased $38.6 million, or 119.9%, to $70.8 million in the three months ended July 27, 2019, compared to $32.2 million in the three months ended July 28, 2018.  The acquisition of Grakon accounted for $40.5 million of the increase, while the impact of foreign currency translation decreased net sales by $1.3 million. Excluding the acquisition of Grakon and foreign currency translation, net sales decreased by $0.6 million primarily due to lower sales volumes of radio remote control and bypass switch products.
Gross Profit. Industrial segment gross profit increased $16.1 million, or 154.8%, to $26.5 million in the three months ended July 27, 2019, compared to $10.4 million in the three months ended July 28, 2018. Gross profit margins increased to 37.4% in the three months ended July 27, 2019, compared to 32.3% in the three months ended July 28, 2018. Gross profit margins increased primarily due to a favorable sales mix relating to our presence withinGrakon business, partially offset by lower sales of our radio remote control products. In addition, gross profit in the automotive interior,three months ended July 27, 2019 was impacted by net tariff expense on imported Chinese goods of $0.3 million.
Income from Operations. Industrial segment income from operations increased $9.4 million, or 132.4%, to $16.5 million in the three months ended July 27, 2019, compared to $7.1 million in the three months ended July 28, 2018. The increase was primarily due to income from operations from Grakon, partially offset by lower sales of our radio remote control products and the impact of foreign currency translation.
Interface Segment Results
Below is a table summarizing results in the three months ended:
(Dollars in Millions) July 27,
2019		 July 28,
2018		 Net Change ($) Net Change (%)
Net Sales $12.9
 $15.6
 $(2.7) (17.3)%
Gross Profit $1.5
 $2.9
 $(1.4) (48.3)%
Income from Operations $0.2
 $0.8
 $(0.6) (75.0)%
         
Percent of sales: July 27,
2019		 July 28,
2018		    
Net Sales 100.0% 100.0%    
Gross Profit 11.6% 18.6%    
Income from Operations 1.6% 5.1%    
Net Sales.  Interface segment net sales decreased $2.7 million, or 17.3%, to $12.9 million in the three months ended July 27, 2019, compared to $15.6 million in the three months ended July 28, 2018.  The decrease was primarily due to lower appliance product sales and reduced sales volumes of legacy data solution products.
Gross Profit.  Interface segment gross profit decreased $1.4 million, or 48.3%, to $1.5 million in the three months ended July 27, 2019, compared to $2.9 million in the three months ended July 28, 2018.  Gross profit margin decreased to 11.6% in the three months ended July 27, 2019, compared to 18.6% in the three months ended July 28, 2018. The decrease

primarily relates to lower sales volumes of our appliance products, lower sales volumes and unfavorable sales mix of our data solutions products, and the strengthening of the Mexican peso as compared to the U.S. dollar during the period.
Income from Operations. Interface segment income from operations decreased $0.6 million, or 75.0%, to $0.2 million in the three months ended July 27, 2019, compared to $0.8 million in the three months ended July 28, 2018. The decrease was due to lower gross profit, offset by the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019.
Medical Segment Results
Below is a table summarizing results in the three months ended:
(Dollars in Millions) July 27,
2019		 July 28,
2018		 Net Change ($) Net Change (%)
Net Sales $0.3
 $0.3
 $—
 —%
Gross Profit $(0.4) $(0.7) $0.3
 42.9%
Loss from Operations $(1.5) $(2.1) $0.6
 28.6%
Net Sales.  The Medical segment had $0.3 million of net sales in both the three months ended July 27, 2019 and July 28, 2018.
Gross Profit. Medical segment gross profit was a loss of $0.4 million in the three months ended July 27, 2019, compared to a loss of $0.7 million in the three months ended July 28, 2018. The improvement primarily relates to lower engineering costs and wages incurred during the period.
Loss from Operations. Medical segment loss from operations decreased $0.6 million to $1.5 million in the three months ended July 27, 2019, compared to $2.1 million in the three months ended July 28, 2018.  The decrease was due to an improvement in gross profit and lower selling and administrative expense. Selling and administrative expenses were reduced by lower professional fees, the benefits of initiatives to reduce overall costs and improve operational profitability taken in fiscal 2019, as well as augmentthe costs incurred in the three months ended July 28, 2018 relating to initiatives to reduce overall costs and improve operational profitability.
Financial Condition, Liquidity and Capital Resources
We believe our effortscurrent world-wide cash balances together with expected future cash flows to be generated from operations and our committed credit facility will be sufficient to support current operations. A significant amount of cash and expected future cash flows are located outside of the U.S. Of the $73.8 million of cash and cash equivalents as of July 27, 2019, $68.8 million was held in overhead consolesubsidiaries outside the U.S. and can be repatriated, primarily through the repayment of intercompany loans and the payment of dividends, without creating material additional income tax expense.
Cash flow is summarized below:
  Three Months Ended
(Dollars in Millions) July 27,
2019		 July 28,
2018
Operating activities:    
Net Income $28.3
 $23.7
Non-cash Items 14.2
 9.7
Changes in Operating Assets and Liabilities (23.4) (13.4)
Net Cash Provided by Operating Activities 19.1
 20.0
Net Cash Used in Investing Activities (13.2) (18.2)
Net Cash Used in Financing Activities (14.4) (9.4)
Effect of Exchange Rate Changes on Cash and Cash Equivalents (0.9) (10.0)
Net Decrease in Cash and Cash Equivalents (9.4) (17.6)
Cash and Cash Equivalents at Beginning of the Year 83.2
 246.1
Cash and Cash Equivalents at End of the Period $73.8
 $228.5

Operating Activities
Net cash provided by operating activities decreased $0.9 million to $19.1 million in the three months ended July 27, 2019, compared to $20.0 million in the three months ended July 28, 2018. The decrease was due to lower cash generated from changes in operating assets and liabilities, partially offset by higher net income adjusted for non-cash items. The $23.4 million of cash outflows for operating assets and liabilities was primarily due to higher accounts receivable, higher inventory and lower accounts payable and other areas. The accounts and transactions of Pacific Insight have been includedliabilities.
Investing Activities
Net cash used in investing activities was $13.2 million in the Automotive segmentthree months ended July 27, 2019, compared to $18.2 million in the three months ended July 28, 2018. The activity relates to purchases of property, plant and equipment.
Financing Activities
Net cash used in financing activities increased $5.0 million to $14.4 million in the three months ended July 27, 2019, compared to $9.4 million in the three months ended July 28, 2018.  In the three months ended July 27, 2019, we had net repayments on our borrowings of $9.7 million, compared to net repayments on our borrowings of $3.6 million in the three months ended July 28, 2018. We paid dividends of $4.1 million in both periods.
Credit Agreement
On September 12, 2018, we entered into a senior unsecured credit agreement that provided a $200.0 million revolving credit facility and a $250.0 million term loan. As of July 27, 2019, $269.6 million in principal was outstanding under the credit agreement.  The term loan matures in September 2023 and requires quarterly principal payments of $3.1 million over the five-year term, with the remaining balance due upon maturity. We were in compliance with all covenants under the credit agreement as of July 27, 2019.
Recent Accounting Pronouncements
See Note 1, "Description of Business and Summary of Significant Accounting Policies" to the condensed consolidated financial statements from the effective date of the acquisition.included in Item 1.

Off-Balance Sheet Arrangements
Hetronic Germany-GmbHWe do not have any off-balance sheet arrangements, as defined under SEC rules.
Legal Matters
For several years, Hetronic Germany-GmbH and Hydronic-Steuersysteme-GmbH (the “Fuchs companies”) served as our distributors for Germany, Austria and other central and eastern European countries pursuant to their respective intellectual property licenses and distribution and assembly agreements. We became aware that the Fuchs companies and their managing director, Albert Fuchs, had materially violated those agreements. As a result, weterminated all of our agreements with the Fuchs companies. On June 20, 2014, we filed a lawsuit against the Fuchs companies in the Federal District Court for the Western District of Oklahoma alleging material breaches of the distribution and assembly agreements and seeking damages, as well as various forms of injunctive relief. The defendants have filed counterclaims alleging breach of contract, interference with business relations and business slander. On April 2, 2015, we amended our complaint against the Fuchs companies to add additional unfair competition and Lanham Act claims and to add additional affiliated parties. As of July 28, 2018, theThis matter remainshas been set for trial in the pre-trial stage.February 2020.
ForIn the three months ended July 28, 201827, 2019 and July 29, 2017,28, 2018, we incurred Hetronic-related legal fees of $0.8 million and $0.9 million, and $2.9 million, respectively.

Results of Operations for the Three Months Ended July 28, 2018 as Compared to the Three Months Ended July 29, 2017
Consolidated Results
Below is a table summarizing results for the three months ended:
(Dollars in Millions) July 28,
2018		 July 29,
2017		 Net Change ($) Net Change (%) 
Net Sales $223.4
 $201.2
 $22.2
 11.0 % 
          
Cost of Products Sold 163.4
 145.6
 17.8
 12.2 % 
          
Gross Profit 60.0
 55.6
 4.4
 7.9 % 
          
Selling and Administrative Expenses 29.5
 29.6
 (0.1) (0.3)% 
Amortization of Intangibles 1.8
 0.6
 1.2
 200.0 % 
Interest Expense (Income), Net 0.2
 (0.2) 0.4
 N/M
*
Other Expense, Net 0.3
 0.8
 (0.5) N/M
*
Income Tax Expense 4.5
 4.3
 0.2
 4.7 % 
Net Income $23.7
 $20.5
 $3.2
 15.6 % 
          
Percent of sales: July 28,
2018		 July 29,
2017		     
Net Sales 100.0% 100.0 %     
Cost of Products Sold 73.1% 72.4 %     
Gross Margins 26.9% 27.6 %     
Selling and Administrative Expenses 13.2% 14.7 %     
Amortization of Intangibles 0.8% 0.3 %     
Interest Expense (Income), Net 0.1% (0.1)%     
Other Expense, Net 0.1% 0.4 %     
Income Tax Expense 2.0% 2.1 %     
Net Income 10.6% 10.2 %     
          
* N/M equals non-meaningful         
Net Sales.  Consolidated net sales increased $22.2 million, or 11.0%, to $223.4 million for the three months ended July 28, 2018, from $201.2 million for the three months ended July 29, 2017.  The Automotive segment net sales increased $18.8 million, or 12.0%, to $175.3 million for the first quarter of fiscal 2019, from $156.5 million for the first quarter of fiscal 2018. The Interface segment net sales decreased $0.4 million, or 1.4%, to $29.0 million for the first quarter of fiscal 2019, from $29.4 million for the first quarter of fiscal 2018. The Power Products segment net sales increased $3.6 million, or 23.7%, to $18.8 million for the first quarter of fiscal 2019, compared to $15.2 million for the first quarter of fiscal 2018.  Translation of foreign operations' net sales for the three months ended July 28, 2018 increased reported net sales by $2.7 million, or 1.2%, due to average currency rate fluctuations These amounts are included in the first quarter of fiscal 2019, compared to the first quarter of fiscal 2018, primarily due to the strengthening of the euro and Chinese yuan compared to the U.S. dollar.
Cost of Products Sold.  Consolidated cost of products sold increased $17.8 million, or 12.2%, to $163.4 million for the three months ended July 28, 2018, compared to $145.6 million for the three months ended July 29, 2017.  Consolidated cost of products sold as a percentage of net sales was 73.1% for the first quarter of fiscal 2019, compared to 72.4% for the first quarter of fiscal 2018.  The Automotive segment cost of products sold as a percentage of net sales increased primarily due to sales mix related to our Pacific Insight and Procoplast businesses and pricing reductions on certain products, partially offset by the weakening of the Mexican peso as compared to the U.S. dollar during the period. The Interface segment cost of products sold as a percentage of net sales was favorably impacted in the first quarter of fiscal 2019 by a favorable currency impact for appliance products due to the weakening of the Mexican peso as compared to the U.S. dollar and increased sales volumes of radio remote control products. The Power Products segment cost of products sold as a percentage of net sales decreased

primarily due to higher sales volumes of our busbar and electronic power steering connector products. The Other segment cost of products sold increased primarily due to an increase in sales volumes and increased spending on research and development initiatives during the period.
Gross Profit. Consolidated gross profit increased $4.4 million, or 7.9%, to $60.0 million for the three months ended July 28, 2018, as compared to $55.6 million for the three months ended July 29, 2017.  Gross margins as a percentage of net sales decreased to 26.9% for the three months ended July 28, 2018, compared to 27.6% for the three months ended July 29, 2017.  The Automotive segment gross margins as a percentage of net sales were negatively impacted by sales mix related to our Pacific Insight and Procoplast businesses and pricing reductions on certain products, partially offset by the weakening of the Mexican peso as compared to the U.S. dollar during the period. The Interface segment gross margins were positively impacted in the first quarter of fiscal 2019 by a favorable currency impact for appliance products due to the weakening of the Mexican peso as compared to the U.S. dollar and increased sales volumes of radio remote control products. The Power Products segment gross margins as a percentage of sales increased primarily due to higher sales volumes of our busbar and electronic power steering connector products. The Other segment gross profit was negatively impacted due to increased spending on research and development initiatives during the period, partially offset by an increase in sales volumes.
Selling and Administrative Expenses.  Selling and administrative expenses decreased by $0.1 million, or 0.3%, to $29.5 million for the three months ended July 28, 2018, compared to $29.6 million for the three months ended July 29, 2017.  Selling and administrative expenses as a percentage of net sales decreased to 13.2% for the three months ended July 28, 2018 from 14.7% for the three months ended July 29, 2017. The amounts for the first quarter of fiscal 2019 include $3.6 million related to our Pacific Insight and Procoplast businesses. Excluding the activity from our Pacific Insight and Procoplast businesses, expenses decreased $3.7 million due primarily to lower acquisition-related costs of $2.2 million, a $2.0 million decrease in stock award amortization and lower legal fees of $1.6 million, partially offset by increased expenses for outside consulting fees, travel, wages and the depreciation of fixed assets.
Amortization of Intangibles.  Amortization of intangibles increased $1.2 million, or 200.0%, to $1.8 million for the three months ended July 28, 2018, compared to $0.6 million for the three months ended July 29, 2017. The increase is due to the amortization expense related to our Pacific Insight and Procoplast businesses.
Interest Expense (Income), Net.  Interest expense (income), net was an expense of $0.2 million for the three months ended July 28, 2018, as compared to income of $0.2 million for the three months ended July 29, 2017. The increase in expense primarily relates to increased debt levels in the first quarter of fiscal 2019, compared to the first quarter of fiscal 2018.
Other Expense, Net. Other expense, net was $0.3 million for the three months ended July 28, 2018, as compared to $0.8 million for the three months ended July 29, 2017. All amounts for both the first quarter of fiscal 2019 and the first quarter of fiscal 2018 relate to currency rate fluctuations. The functional currencies of our operations are the British pound, Canadian dollar, Chinese yuan, euro, Indian rupee, Mexican peso, Singapore dollar, Swiss franc and U.S. dollar. Some foreign operations have transactions denominated in currencies other than their functional currencies, primarily sales in U.S. dollars, euros and Chinese yuan, creating exchange rate sensitivities.
Income Tax Expense.  Income tax expense increased $0.2 million, or 4.7%, to $4.5 million for the three months ended July 28, 2018, compared to $4.3 million for the three months ended July 29, 2017.  The Company's effective tax rate decreased to 16.0% in the first quarter of fiscal 2019, compared to 17.1% in the first quarter of fiscal 2018. The decrease primarily relates to the composition of pre-tax income in regions with lower effective tax rates, partially offset by some discreet favorable adjustments in the first quarter of fiscal 2018.
Net Income.  Net income was $23.7 million for the three months ended July 28, 2018, compared to $20.5 million for the three months ended July 29, 2017. Net income was favorably impacted by increased sales volumes and net income from our new acquisitions, lower acquisition-related expenses, lower stock award amortization related to our long-term incentive program, lower legal fees and higher sales of our radio remote control products. These were partially offset by higher intangible asset amortization, customer pricing reductions and higher interest expenses.

Operating Segments
Automotive Segment Results
Below is a table summarizing results for the three months ended:
(Dollars in Millions) July 28,
2018		 July 29,
2017		 Net Change ($) Net Change (%)
Net Sales $175.3
 $156.5
 $18.8
 12.0 %
         
Cost of Products Sold 128.3
 110.6
 17.7
 16.0 %
         
Gross Profit 47.0
 45.9
 1.1
 2.4 %
         
Selling and Administrative Expenses 14.1
 10.1
 4.0
 39.6 %
         
Income from Operations $32.9
 $35.8
 $(2.9) (8.1)%
         
Percent of sales: July 28,
2018		 July 29,
2017		    
Net Sales 100.0% 100.0%    
Cost of Products Sold 73.2% 70.7%    
Gross Margins 26.8% 29.3%    
Selling and Administrative Expenses 8.0% 6.5%    
Income from Operations 18.8% 22.9%    
Net Sales.  Automotive segment net sales increased $18.8 million, or 12.0%, to $175.3 million for the three months ended July 28, 2018, from $156.5 million for the three months ended July 29, 2017.  Net sales increased in North America by $11.1 million, or 12.0%, to $103.8 million in the first quarter of fiscal 2019, compared to $92.7 million in the first quarter of fiscal 2018. North American automotive sales in the first quarter of fiscal 2019 include $20.2 million from Pacific Insight, which was acquired in the second quarter of fiscal 2018. Other North American sales decreased for our integrated center stack products due primarily to a combination of pricing reductions and lower sales volumes. Sales for our transmission lead-frame assemblies decreased due primarily to pricing reductions and lower sales volumes in the first quarter of fiscal 2019, compared to the first quarter of fiscal 2018. Sales of our human machine interface assembly products increased primarily due to increased sales volume as the result of new program launches in fiscal 2018. Net sales in Europe increased $10.9 million, or 26.8%, to $51.5 million in the first quarter of fiscal 2019, compared to $40.6 million in the first quarter of fiscal 2018. The increase in European sales includes $8.3 million from our Procoplast business, which was acquired at the end of the first quarter of fiscal 2018. Other European sales increased primarily due to higher sales volumes of hidden switches and sensor products, partially offset by the exclusion of pre-production reimbursements from net sales due to the adoption of ASC 606 on April 29, 2018. European pre-production reimbursements were $0.9 million during the three months ended July 29, 2017. Net sales in Asia decreased $3.2 million, or 13.8%, to $20.0 million in the first quarter of fiscal 2019, compared to $23.2 million in the first quarter of fiscal 2018, primarily due to lower sales of our transmission lead-frame assemblies due to a combination of pricing reductions and lower sales volumes. In addition, sales volumes for steering angle sensor products were lower, as the products approach end of production. Translation of foreign operations' net sales for the three months ended July 28, 2018 increased reported net sales by $2.7 million, or 1.5%, due to average currency rates in the first quarter of fiscal 2019, compared to the average currency rates in the first quarter of fiscal 2018, primarily due to the strengthening of the euro and Chinese yuan as compared to the U.S. dollar.
Cost of Products Sold.  Automotive segment cost of products sold increased $17.7 million, or 16.0%, to $128.3 million for the three months ended July 28, 2018, compared to $110.6 million for the three months ended July 29, 2017.  The Automotive segment cost of products sold as a percentage of net sales increased to 73.2% in the first quarter of fiscal 2019, compared to 70.7% in the first quarter of fiscal 2018.  The cost of products sold as a percentage of net sales increased primarily due to sales mix related to our Pacific Insight and Procoplast businesses and pricing reductions on certain products, partially offset by the weakening of the Mexican peso as compared to the U.S. dollar during the period.

Gross Profit. Automotive segment gross profit increased $1.1 million, or 2.4%, to $47.0 million for the three months ended July 28, 2018, as compared to $45.9 million for the three months ended July 29, 2017.  The Automotive segment gross margins as a percentage of net sales decreased to 26.8% for the three months ended July 28, 2018, as compared to 29.3% for the three months ended July 29, 2017.  Gross margins as a percentage of net sales were negatively impacted by sales mix related to our Pacific Insight and Procoplast businesses and pricing reductions on certain products, partially offset by the weakening of the Mexican peso as compared to the U.S. dollar during the period.
Selling and Administrative Expenses.  Selling and administrative expenses increased $4.0 million, or 39.6%, to $14.1 million for the three months ended July 28, 2018, as compared to $10.1 million for the three months ended July 29, 2017.  Selling and administrative expenses as a percentage of net sales increased to 8.0% for the three months ended July 28, 2018, from 6.5% for the three months ended July 29, 2017. The amounts for the first quarter of fiscal 2019 include $4.9 million related to our Pacific Insight and Procoplast businesses, which includes $1.3 million of intangible asset amortization expense. Excluding the activity from our Pacific Insight and Procoplast businesses, expenses decreased $0.9 million due primarily to the reduction in stock award amortization expense for our long-term incentive program, partially offset by increased bonus expense in the period.
Income from Operations. Automotive segment income from operations decreased $2.9 million, or 8.1%, to $32.9 million for the three months ended July 28, 2018, compared to $35.8 million for the three months ended July 29, 2017. Income from operations for the first quarter of fiscal 2019 decreased due primarily to pricing reductions on certain products and increased intangible asset amortization expense, partially offset by the income from operations from our Pacific Insight and Procoplast businesses, a reduction in stock award amortization expense for our long-term incentive program and the weakening of the Mexican peso as compared to the U.S. dollar during the period.
Interface Segment Results
Below is a table summarizing results for the three months ended:
(Dollars in Millions) July 28,
2018		 July 29,
2017		 Net Change ($) Net Change (%)
Net Sales $29.0
 $29.4
 $(0.4) (1.4)%
         
Cost of Products Sold 21.4
 23.0
 (1.6) (7.0)%
         
Gross Profit 7.6
 6.4
 1.2
 18.8 %
         
Selling and Administrative Expenses 4.1
 6.0
 (1.9) (31.7)%
         
Income from Operations $3.5
 $0.4
 $3.1
 775.0 %
         
Percent of sales: July 28,
2018		 July 29,
2017		    
Net Sales 100.0% 100.0%    
Cost of Products Sold 73.8% 78.2%    
Gross Margins 26.2% 21.8%    
Selling and Administrative Expenses 14.1% 20.4%    
Income from Operations 12.1% 1.4%    
Net Sales.  Interface segment net sales decreased $0.4 million, or 1.4%, to $29.0 million for the three months ended July 28, 2018, from $29.4 million for the three months ended July 29, 2017.  Net sales decreased in North America by $2.1 million, or 9.8%, to $19.3 million in the first quarter of fiscal 2019, compared to $21.4 million in the first quarter of fiscal 2018. North American net sales decreased by $0.7 million due to our Connectivity business. The Company exited this business at the end of fiscal 2017 due to adverse business conditions. Excluding the $0.7 million of lower net sales for Connectivity, North American sales decreased by $1.4 million primarily due to decreased sales volumes of appliance products in the quarter. Net sales increased in Europe by $1.8 million, or 24.7%, to $9.1 million in the first quarter of fiscal 2019, compared to $7.3 million in the first quarter of fiscal 2018. The increase was due primarily to an increase in sales of radio remote control products. Net

sales in Asia decreased $0.1 million, or 14.3%, to $0.6 million in the first quarter of fiscal 2019, compared to $0.7 million in the first quarter of fiscal 2018, primarily due to lower sales volumes of legacy products.
Cost of Products Sold.  Interface segment cost of products sold decreased $1.6 million, or 7.0%, to $21.4 million for the three months ended July 28, 2018, compared to $23.0 million for the three months ended July 29, 2017.  Interface segment cost of products sold as a percentage of net sales decreased to 73.8% for the three months ended July 28, 2018, compared to 78.2% for the three months ended July 29, 2017. Cost of products sold as a percentage of net sales was favorably impacted in the first quarter of fiscal 2019 by a favorable currency impact for appliance products due to the weakening of the Mexican peso as compared to the U.S. dollar and increased sales volumes of radio remote control products.
Gross Profit. Interface segment gross profit increased $1.2 million, or 18.8%, to $7.6 million for the three months ended July 28, 2018, compared to $6.4 million for the three months ended July 29, 2017.  Gross margins as a percentage of net sales increased to 26.2% for the three months ended July 28, 2018, compared to 21.8% for the three months ended July 29, 2017.  Gross margins were positively impacted in the first quarter of fiscal 2019 by a favorable currency impact for appliance products due to the weakening of the Mexican peso as compared to the U.S. dollar and increased sales volumes of radio remote control products.
Selling and Administrative Expenses.  Selling and administrative expenses decreased $1.9 million, or 31.7%, to $4.1 million for the three months ended July 28, 2018, compared to $6.0 million for the three months ended July 29, 2017.  Selling and administrative expenses as a percentage of net sales decreased to 14.1% for the three months ended July 28, 2018, from 20.4% for the three months ended July 29, 2017. The first quarter of fiscal 2019 benefitted from lower legal fees, as well as lower stock award amortization expense for our long-term incentive program.
Income from Operations. Interface segment income from operations increased $3.1 million, or 775.0%, to $3.5 million for the three months ended July 28, 2018, compared to $0.4 million for the three months ended July 29, 2017. Income from operations increased due primarily to lower legal fees, higher sales of radio remote control products and a favorable currency impact, partially offset by lower sales volumes on certain appliance products.
Power Products Segment Results
Below is a table summarizing results for the three months ended:
(Dollars in Millions) July 28,
2018		 July 29,
2017		 Net Change ($) Net Change (%)
Net Sales $18.8
 $15.2
 $3.6
 23.7%
         
Cost of Products Sold 13.2
 11.0
 2.2
 20.0%
         
Gross Profit 5.6
 4.2
 1.4
 33.3%
         
Selling and Administrative Expenses 1.2
 0.9
 0.3
 33.3%
         
Income from Operations $4.4
 $3.3
 $1.1
 33.3%
         
Percent of sales: July 28,
2018		 July 29,
2017		    
Net Sales 100.0% 100.0%    
Cost of Products Sold 70.2% 72.4%    
Gross Margins 29.8% 27.6%    
Selling and Administrative Expenses 6.4% 5.9%    
Income from Operations 23.4% 21.7%    
Net Sales.  Power Products segment net sales increased $3.6 million, or 23.7%, to $18.8 million for the three months ended July 28, 2018, compared to $15.2 million for the three months ended July 29, 2017.  Net sales increased in North America by $1.5 million, or 23.8%, to $7.8 million in the first quarter of fiscal 2019, compared to $6.3 million in the first quarter of fiscal 2018, primarily due to higher sales volumes of PowerRail® and other busbar products. Net sales in Europe

decreased by $0.9 million, or 29.0%, to $2.2 million in the first quarter of fiscal 2019, compared to $3.1 million in the first quarter of fiscal 2018, primarily due to lower sales volumes of bypass switches, partially offset by increased sales of our electronic power steering connector products. Net sales in Asia increased $3.0 million, or 51.7%, to $8.8 million in the first quarter of fiscal 2019, compared to $5.8 million in the first quarter of fiscal 2018, due primarily to increased sales of busbar products.
Cost of Products Sold.  Power Products segment cost of products sold increased $2.2 million, or 20.0%, to $13.2 million for the three months ended July 28, 2018, compared to $11.0 million for the three months ended July 29, 2017.  The Power Products segment cost of products sold as a percentage of net sales decreased to 70.2% for the three months ended July 28, 2018, from 72.4% for the three months ended July 29, 2017.  The decrease primarily relates to higher sales volumes of our busbar and electronic power steering connector products.
Gross Profit.  Power Products segment gross profit increased $1.4 million, or 33.3%, to $5.6 million in the first quarter of fiscal 2019, compared to $4.2 million in the first quarter of fiscal 2018.  Gross margins as a percentage of net sales increased to 29.8% for the three months ended July 28, 2018, from 27.6% for the three months ended July 29, 2017. The increase primarily relates to higher sales volumes of our busbar and electronic power steering connector products.
Selling and Administrative Expenses.  Selling and administrative expenses increased $0.3 million, or 33.3%, to $1.2 million for the three months ended July 28, 2018, compared to $0.9 million for the three months ended July 29, 2017.  Selling and administrative expenses as a percentage of net sales increased to 6.4% for the three months ended July 28, 2018, from 5.9% for the three months ended July 29, 2017. Selling and administrative expenses increased primarily due to higher salary expense during the period.
Income From Operations. Power Products segment income from operations increased $1.1 million, or 33.3%, to $4.4 million for the three months ended July 28, 2018, compared to $3.3 million for the three months ended July 29, 2017. Income from operations increased due primarily to higher sales volumes, partially offset by higher salary expense.
Other Segment Results
Below is a table summarizing results for the three months ended:
(Dollars in Millions) July 28,
2018		 July 29,
2017		 Net Change ($)
Net Sales $0.3
 $0.1
 $0.2
       
Cost of Products Sold 1.0
 0.7
 0.3
       
Gross Profit (0.7) (0.6) (0.1)
       
Selling and Administrative Expenses 1.4
 2.1
 (0.7)
       
Loss from Operations $(2.1) $(2.7) $0.6
Net Sales.  The business in this segment, medical devices, had minimal net sales in the first quarter of fiscal 2019 and the first quarter of fiscal 2018 due to newly launched products.
Cost of Products Sold.  Other segment cost of products sold was $1.0 million for the three months ended July 28, 2018, compared to $0.7 million for the three months ended July 29, 2017. The increase primarily relates to an increase in sales volumes and increased spending on research and development initiatives during the period.
Gross Profit. The Other segment gross profit was a loss of $0.7 million for the three months ended July 28, 2018, compared to $0.6 million for the three months ended July 29, 2017.  The increased loss primarily relates to increased spending on research and development initiatives during the period, partially offset by an increase in sales volumes.
Selling and Administrative Expenses.  Selling and administrative expenses decreased $0.7 million, to $1.4 million for the three months ended July 28, 2018, compared to $2.1 million for the three months ended July 29, 2017. The decrease in selling and administrative expenses for the first quarter of fiscal 2019 primarily relates to decreased marketing and bonus expense in the period.

Loss From Operations The Other segment loss from operations decreased $0.6 million, to $2.1 million for the three months ended July 28, 2018, compared to $2.7 million for the three months ended July 29, 2017. The decreased loss relates to lower selling and administrative expenses related to decreased marketing and bonus expense in the period, partially offset by increased spending on research and development initiatives during the period.Interface segment.
Liquidity and Capital Resources
We believe our current world-wide cash balances together with expected future cash flows to be generated from operations and our committed credit facility will be sufficient to support current operations. A significant amount of cash and expected future cash flows are located outside of the U.S. Of the $228.5 million of cash and cash equivalents as of July 28, 2018, $223.2 million was held in subsidiaries outside the U.S. and $65.2 million of this amount is deemed to be permanently reinvested.
We are party to a Credit Agreement with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank, National Association, as L/C Issuer, and the Lenders named therein (the “Credit Agreement”). The Credit Agreement has a maturity date of November 18, 2021. The credit facility is in the maximum principal amount of $150.0 million, with an option to increase the principal amount by up to an additional $100.0 million, subject to customary conditions and approval of the lender(s) providing new commitment(s). The credit facility is available for general corporate purposes, including working capital and acquisitions. The credit facility provides for variable rates of interest based on the type of borrowing and the Company's debt to EBITDA financial ratio. The Credit Agreement is guaranteed by the Company’s wholly-owned U.S. subsidiaries. The Credit Agreement contains customary representations and warranties, financial covenants, restrictive covenants and events of default. At July 28, 2018, the interest rate on the credit facility was 1.25% plus LIBOR and we were in compliance with the covenants of the agreement. During the three months ended July 28, 2018, we had no borrowings and payments of $2.3 million, which includes interest of $0.3 million, under this credit facility. As of July 28, 2018, there were outstanding balances against the credit facility of $28.0 million.
In connection with the agreement to purchase Grakon on August 20, 2018, the Company entered into the Commitment Letter with the Commitment Parties, pursuant to which, among other things, the Commitment Parties have committed to provide, subject to the terms and conditions of the Commitment Letter, a $250 million senior unsecured term loan credit facility and a $200 million senior unsecured revolving credit facility, the proceeds of which may be used to finance the acquisition and for working capital, capital expenditures, and other lawful corporate purposes. The interest rate on the credit facility and term loan is LIBOR + applicable margin of between 1.25% to 2% depending on consolidated leverage levels. This new credit agreement will replace Methode’s existing revolving credit facility.

Methode's subsidiary, Pacific Insight, is party to two separate credit agreements, one with the Bank of Montreal and one with Roynat. The credit agreement with the Bank of Montreal has a maturity date of December 21, 2019 and provides a credit facility in the maximum principal amount of C$10.0 million, with an option to increase the principal amount by up to an additional C$5.0 million. Availability under the facility is determined based upon a percentage of eligible accounts receivable and finished goods inventory balances and funds are available in either Canadian or U.S. currency. Interest is calculated at either the Canadian Dollar Offered Rate plus 1.25%, the Federal Funds Rate plus 1.25% or LIBOR plus 1.75%. As of July 28, 2018, there were no outstanding balances against this credit facility and Pacific Insight was in compliance with the covenants of the agreement.
The credit agreement between Pacific Insight and Roynat has a maturity date of May 24, 2020 and provides a credit facility in the maximum principal amount of $10.0 million, with an option to increase the principal amount by up to an additional $3.5 million. The interest rate on the credit facility is 2.25% plus LIBOR. During the three months ended July 28, 2018, we have had no borrowings and repayments of $0.9 million under this credit facility. As of July 28, 2018, there were outstanding balances against the credit facility of $2.7 million, of which $0.7 million is due within the next twelve months, and Pacific Insight was in compliance with the covenants of the agreement. We believe the fair value approximates the carrying amount as of July 28, 2018.
Excluding credit facilities, the Company also holds debt at its Procoplast subsidiary. As of July 28, 2018, Procoplast holds short-term debt totaling $3.3 million, with a weighted average interest rate of 1.68%. As of July 28, 2018, Procoplast holds long-term debt that consists of eighteen notes totaling $19.2 million, with a weighted-average interest rate of 1.45% and maturities ranging from 2019 to 2031.

Cash Flow - Operating Activities
Net cash provided by operating activities decreased $3.6 million to $20.0 million for the three months ended July 28, 2018, compared to $23.6 million for the three months ended July 29, 2017, primarily due to the changes in operating assets and liabilities, partially offset by an increase in our net income, adjusted for depreciation, amortization, deferred tax expense, stock-based compensation and the provision for bad debt. For the three months ended July 28, 2018, net changes in operating assets and liabilities resulted in cash used of $13.7 million, primarily due to a decrease in accounts payable and other expenses, an increase in inventory levels and an increase in prepaid expenses and other assets, partially offset by the timing of receivable collections. For the three months ended July 29, 2017, net changes in operating assets and liabilities resulted in cash used of $6.6 million, primarily due to a decrease in accounts payable and other expenses, an increase in prepaid expenses and other assets and an increase in inventory levels, partially offset by the timing of receivable collections.
Cash Flow - Investing Activities
Net cash used in investing activities was $18.2 million for the three months ended July 28, 2018, compared to $29.9 million for the three months ended July 29, 2017. Net cash used for the purchases of purchase of property, plant and equipment was $18.2 million for the three months ended July 28, 2018, compared to $8.0 million for the three months ended July 29, 2017. Net cash used in investing activities for the three months ended July 27, 2017 also included $22.2 million, net of cash acquired, for the acquisition of Procoplast.
Cash Flow - Financing Activities
Net cash used by financing activities increased $3.7 million to $9.4 million for the three months ended July 28, 2018, compared to $5.7 million for the three months ended July 29, 2017.  During both the three months ended July 28, 2018 and July 29, 2017, the Company had no borrowings against credit facilities. During the three months ended July 28, 2018, the Company had repayments of borrowings against credit facilities of $2.9 million, compared to $2.0 million during the three months ended July 29, 2017. We paid dividends of $4.1 million and $3.4 million in the three months ended July 28, 2018 and July 29, 2017, respectively. The first three months of fiscal 2019 included $1.7 million of taxes paid related to net share settlement of equity awards, compared to $0.3 million during the first three months of fiscal 2018. There were no proceeds from the exercise of stock options in either the first three months of fiscal 2019 or the first three months of fiscal 2018.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, other than operating leases and purchase obligations entered into in the normal course of business.
Item 3.  Quantitative And Qualitative Disclosures About Market Risk
Certain ofWe are exposed to market risks from foreign currency exchange, interest rates, and commodity prices, which could affect our operating results, financial position and cash flows. We do not use any derivative financial instruments to manage these risks.


Foreign Currency Risk

We are exposed to foreign operations enter into transactionscurrency risk on sales, costs and assets and liabilities denominated in currencies other than their functional currency, primarilythe U.S. dollar. We seek to manage our foreign exchange risk largely through operational means, including matching revenue with same-currency costs and assets with same-currency liabilities. We currently transact business in eight primary currencies worldwide, of which the most significant were the U.S. dollar, the euro, the Mexican peso, and the euro.Chinese renminbi. A hypothetical 10% adverse change in foreign currency exchange rates from balance sheet date levels could impacthave impacted our income before income taxes by $1.8$2.1 million as ofin the three months ended July 28, 201827, 2019. However, this quantitative measure has inherent limitations. The sensitivity analysis disregards the possibility that rates can move in opposite directions and $1.9 million as of April 28, 2018.  We also have foreignthat gains from one currency exposure arisingmay or may not be offset by losses from theanother currency.

The translation of the assets and liabilities of our net equity investment in our foreign operations to U.S. dollars.  We generally view our investments in foreign operations with functional currencies other thaninternational subsidiaries is made using the U.S. dollar as long-term.  The currencies to which we are exposed are the British pound, Canadian dollar, Chinese yuan, euro, Indian rupee, Mexican peso, Singapore dollar and Swiss franc.  A 10% change in foreign currency exchange rates fromas of the end of the reporting period. Translation adjustments are not included in determining net income but are included in accumulated other comprehensive loss within shareholders’ equity on the condensed consolidated balance sheet date levels could impact oursheets until a sale or substantially complete liquidation of the net foreign investmentsinvestment in the international subsidiary takes place. As of July 27, 2019, the cumulative net currency translation adjustments reduced shareholders’ equity by $52.4$15.2 million at July 28, 2018 and $49.3 million atas of April 28, 2018.27, 2019, the cumulative net currency translation adjustments reduced shareholders’ equity by $13.6 million.

Interest Rate Risk

We are exposed to market risk from changes in interest rates. The interest rate risk for our credit agreements,agreement, under which we had $30.7$269.6 million of net borrowings atas of July 28, 2018,27, 2019, is variable and is determined based on LIBOR. We estimate that a one percentage point change1% increase in interest rates under our credit agreement would not have a material impactresult in increased annual interest expense of $2.7 million.
Commodity Price Risk

We are exposed to commodity price risk primarily on our resultsraw material purchases. These raw materials are not rare or unique to our industry. The cost of operations for fiscal 2018 based uponcopper, resins, and other commodities, such as fuel and energy, has fluctuated in recent years due to changes in global supply and demand. Our gross margins could be affected if these types of costs continue to fluctuate. We actively manage these raw material costs through global sourcing initiatives and price increases on our current and expected levelsproducts. However, in the short-term, rapid increases in raw material costs can be very difficult to offset with price increases because of debt.contractual agreements with our customers.

Item 4.  Controls And Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, we performed an evaluation under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934).  The Company’s disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s

applicable rules and forms.  As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting during the quarter ended July 28, 201827, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.    OTHER INFORMATION
Item 1A.    Risk Factors
Other than the supplemental risk factors set forth below, thereThere have been no material changes to the risk factors disclosed in Part I - Item 1A, Risk Factors of our Form 10-K for the fiscal year ended April 28, 2018.
We cannot guarantee that the acquisition of Grakon will be consummated within the expected time period, or at all, and if consummated, that the Company's assumptions regarding the acquisition will be correct.
The Company cannot guarantee that the acquisition of Grakon will be consummated within the expected time period, or at all. If the acquisition is consummated, it may involve unexpected costs or liabilities, we may be unable to achieve the expected synergies and operating efficiencies within the expected time frames, or at all and the integration of Grakon into our business may be more difficult, time consuming or costly than expected. In addition, revenues, margins and cash flows following acquisition may be lower than expected and operating costs, customer loss and business disruption may be greater than expected.
Any changes in U.S. trade policy could trigger retaliatory actions by affected countries, resulting in ‘trade wars.’
Any changes in U.S. trade policy could trigger retaliatory actions by affected countries, resulting in ‘trade wars,’ which could increase costs for goods imported into the United States. This increase in costs may reduce customer demand for these products if the parties having to pay those tariffs increase their prices, or if trading partners limit their trade with the United States. If these consequences are realized, the volume of economic activity in the United States, including demand for our products, may be materially reduced. Such a reduction may materially and adversely affect our sales and our business.27, 2019.
Item 6.          Exhibits
Exhibit
Number
 Description
31.1 
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.2 
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32 
Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350
101.1 XBRL Instance
101.2 XBRL Taxonomy Extension Schema Document
101.3 XBRL Taxonomy Extension Calculation Linkbase Document
101.4 XBRL Taxonomy Extension Label Linkbase Document
101.5 XBRL Taxonomy Extension Presentation Linkbase Document
101.6 XBRL Taxonomy Extension Definition Linkbase Document

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
   METHODE ELECTRONICS, INC.
    
   By:/s/ Ronald L.G. Tsoumas
    Ronald L.G. Tsoumas
    Chief Financial Officer
    (principal financial officer)
    
Dated:August 30, 201829, 2019  


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